When one company offers to buy another, shares of the company to be acquired usually jump up near the offering price. That didn't happen when Xanthic Biopharma, operating as Green Growth Brands, offered to buy Aphria (NYSE:APHA). The unusual disconnect has some marijuana investors scratching their heads.

Green Growth Brands offered Aphria around $8.07 per share, but Aphria began trading at around 25% below the offered price after investors had a weekend to dig through the details. There are a lot of ins and outs to consider, but these are the largest reasons the offering announcement isn't having the expected effect.

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1. Green Growth isn't making sense

Aphria's New York Stock Exchange listing provides easy access to mountains of potential capital that Green Growth can't tap without it. In its announcement, Green Growth Brands clearly stated expectations to remain listed on the Canadian Securities Exchange under the symbol GGB following its offer. Green Growth didn't mention its listing intentions following the completion of the intended acquisition, but the company would be crazy to abandon an NYSE listing.

As long as marijuana is illegal under federal law, marijuana companies listed on major U.S. exchanges aren't allowed to do business here. That's why Aphria divested all its U.S. assets ahead of its NYSE listing this September.

Also in September, Green Growth Brands completed its acquisition of Nevada Organic Remedies (NOR). The acquisition provided seven licenses to operate dispensaries in and around Las Vegas, although just one location is currently open for business. Green Growth spent $56.8 million to acquire NOR's fledgling operation, and will most likely suffer a heavy loss if it has to divest the Nevada-based assets to maintain Aphria's NYSE listing. 

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2. It's getting harder to believe Aphria insiders are just getting lucky

During a recent interview with Bloomberg, Green Growth CEO Peter Horvath insisted nobody at Aphria prodded him to make an offer for Aphria in an effort to spark investor interest for the target. The denial didn't have much of an effect, partly because an Aphria-controlled investment fund called GA Opportunities is Green Growth's second-largest shareholder.

Green Growth is still re-forming its board members because it just closed on a merger with Xanthic Biopharma in November. Perhaps it's just a coincidence that two of Xanthic's board members with close ties to Aphria put feed money into Green Growth in March.

In December, Aphria's shares were pummeled following a short-seller report that highlighted associations between insiders at the company and Latin American operations that the company acquired for 193 million in Canadian dollars ($141.5 million) earlier this year. The mash-up of Latin American assets wasn't Aphria's first questionable investment in 2018.

Earlier this year, Aphria insiders, including CEO Vic Neufeld, waited until the day before closing the CA$425 million Nuuvera acquisition to tell Aphria shareholders that they owned stakes in Nuuvera and stood to benefit. 

 

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3. Green Growth Brands doesn't have the money

Green Growth's lack of cash is the largest reason Aphria shares haven't risen to the proposed acquisition price. Green Growth offered Aphria CA$11 per share ($8.07), which works out to $2.1 billion. Unfortunately, Green Growth's balance sheet finished September with just $1.5 million in cash.

It would take years for dozens of successful dispensaries in Las Vegas to generate enough profit to buy Aphria for $2.1 billion in cash, which is why Green Growth offered 1.57 shares of its stock to Aphria shareholders instead. In a highly unusual tactic, Green Growth insists its stock price will grow to a level that values Aphria at CA$11 per share. That means Green Growth must more than double the price of its own stock to make the deal work.

Green Growth's prediction that its stock price will double was a bold move that's starting to look ridiculous. Remember: Management is trying to convince investors that its fledgling U.S. operations are extremely valuable, in order to complete a deal that will force it to divest those operations.

Just another reason to avoid Aphria

Hopefully, Green Growth's offer wasn't a failed attempt directed by Aphria to drum up interest from companies that keep pouring money into other Canadian cannabis producers. If it was a trick, though, it would simply be another bullet point in a long list of reasons Aphria is a marijuana stock to avoid.

Trust is important, and so is an ability to execute. Until Aphria proves itself capable of operating a slew of recently acquired assets around the globe without posting huge losses, it's best to watch this story unravel from a safe distance.

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