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Pot producer Aphria rejects US$2.1b Green Growth hostile bid

[NEW YORK] Canadian marijuana producer Aphria Inc rejected a planned C$2.8 billion (S$2.81 billion) hostile offer by US cannabis retailer Green Growth Brands Ltd, saying it significantly undervalues the company.

The proposed bid would be about 23 per cent below Aphria's average share price over a 20-day period, the Canadian company said in a statement. Columbus, Ohio-based Green Growth on Thursday offered C$11 per share in an all-stock bid for Aphria, a 46 per cent premium over the closing price on Monday, after the stock plunged in November and early December.

"The board has determined that the GGB proposal, as it currently stands, significantly undervalues the company," Aphria Chairman Irwin Simon said in a statement Friday.

The US company went public with its proposal less than six hours after presenting it to the target, Aphria said, describing the offer as "highly conditional" and not reflective of the Canadian producer's future value. It said the board has established an independent committee of directors to consider the proposal and any formal offer received.

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Aphria, one of Canada's biggest pot producers, became an easy target after its share price almost halved in two days when short-sellers Quintessential Capital Management and Hindenburg Research alleged on Dec 3 that the company overpaid for Latin American assets held by insiders.

The Leamington, Ontario-based company called the allegations false, saying the purchase was a transaction negotiated at arm's length and that both companies retained professional financial advisers. Aphria appointed a special committee of independent directors to review its acquisition of LATAM Holdings Inc, which was targeted in the short-seller report.

"They're currently at an attractive value in the market," Green Growth Chief Executive Officer Peter Horvath said in a phone interview on Thursday, adding that his company, which makes beauty and wellness products using cannabis-derived ingredients, had been in talks with Aphria for a few months and was impressed by its capabilities after touring its production facilities.

While Quintessential's allegations are "something to be concerned about," the transaction, if successful, would take at least three months to complete, Horvath said. "In that time period, we should have an understanding if there is any overhang at all."

Aphria's US-listed shares jumped as much as 33 per cent in late trading after Bloomberg first reported on Green Growth's plans. They were up 13 per cent to US$6.29 at 7.20 am in New York on Friday.

The offer would give Aphria shareholders 1.5714 common shares of Green Growth for each Aphria share. Green Growth discussed a friendly offer with Aphria's board before announcing its intention to launch a hostile bid and believes it has support from investors holding about 10 per cent of outstanding Aphria shares, Green Growth said in a statement.

Green Growth approached Aphria's board about a week ago with a proposal and has also acquired about 3 million shares in the company, Horvath said.

"We were looking for the most positive and friendly way to do this, but I think ultimately, we felt like a delay would be unnecessary," given the premium being offered, said Mr Horvath, who previously held executive positions at Victoria's Secret and American Eagle Outfitters Inc. "We wanted to be proactive and reach out directly to the shareholders."

The bid for Aphria marks further interest in an industry that BMO Capital Markets estimated could reach C$120 billion in recreational sales globally by 2025. Canada was the first Group of Seven country to legalize the drug for recreational use on Oct 17 and more US states are moving in that direction though it remains banned at the federal level.

The cannabis market in the US and Canada combined is expected to reach US$47 billion by 2023, Mr Horvath said.

Current laws wouldn't allow pot produced by Aphria in Canada to be shipped to Green Growth's retail business in the U.S. "We're making this decision based on taking the talent from both organizations and leveraging it across the different geographies," Mr Horvath said. "You can't move product but you can certainly transport intellectual property and capability. It's about combining our consumer expertise with their grow expertise."