Aphria makes offer for firms in South America, Jamaica
Ontario pot grower’s sister company in process of acquiring assets worth $200M
TORONTO Two weeks after Canopy Growth Corp. announced an expansion into Latin America, rival cannabis grower Aphria Inc. has announced a “proposed acquisition” worth roughly $200 million that would see it acquire two companies in South America and take a sizable stake in a Caribbean marijuana producer.
The assets — in Colombia, Argentina and Jamaica — are owned or are in the process of being acquired by Aphria’s sister company Scythian Biosciences Corp., and held by a Scythian subsidiary LATAM Holdings Inc.
In return for LATAM Holdings, Aphria will issue Scythian 15.7 million shares, “for aggregate transaction consideration of $193 million ... at a deemed share price of $12.31,” according to a press release.
That equates to 6.3 per cent of Aphria’s outstanding shares, calculated on a non-diluted basis, and would make Scythian the largest single Aphria shareholder.
The Leamington, Ont.-based grower would also assume US$1 million of Scythian’s debt.
The deal is the latest international move for Aphria, which surprised observers in January by agreeing to pay $825 million, mostly in shares, for Nuuvera Inc., an early stage company with little growing experience and a disparate set of international assets. The final price for Nuuvera, subsequently rebranded as Aphria International, was around $425 million, following an industry-wide drop in share prices.
The key asset in Aphria’s new, south-facing deal is ColCanna SAS, a Colombian marijuana producer, licensed to harvest cannabidiol (CBD) on 34 acres of land in the country’s western coffee zone, as well as import and export CBD oil.
Canadian cannabis companies, including Canopy Growth, are increasingly targeting Colombia as a prime agricultural setting with export channels to the rest of Latin America. The country legalized cannabis cultivation for export as well as domestic medical use two years ago.
“If we do it right and build right in Colombia, it could also be a hub for export outside of Latin America,” said Aphria’s chief executive Vic Neufeld.
In Argentina, where only CDB oil for medical use is permitted, Aphria would take ownership of pharmaceutical importer and wholesaler ABP S.A., which is licensed to import CBD Oil, and already has a supply agreement in place with Aphria.
In Jamaica, Aphria would get a 49-per-cent stake in Marigold Projects Jamaica Ltd., a licensed cannabis grower with conditional approval from the Jamaican government to process and sell cannabis into the country’s medical and “nutraceutical” markets.
Aphria will also have “a right of first offer and refusal” to buy a controlling stake in a Brazilian company that Scythian is seeking to acquire, pending its receipt of an operating licence.
Tuesday’s deal is the culmination of months of manoeuvring by Aphria and Scythian, two closely connected companies, which, until recently, shared two board members and Neufeld as chief executive.
Aphria, Canada’s third most valuable publicly traded cannabis company, has a nine-per-cent stake in Scythian and several Aphria insiders, including Neufeld and Aphria co-founders Cole Cacciavillani and John Cervini, are leading Scythian shareholders.
Both companies are also backed by the Delavaco Group, a private equity firm that manages money for several wealthy Canadian families, including the Serruya brothers of Yogen Früz fame.
Since at least March, Scythian has been scooping up international assets with Aphria’s explicit support. And while it has typically described itself to investors as a biotech company funding research into cannabis treatment for traumatic brain injuries, Scythian appears to function mainly as an acquisition arm of Aphria.
“It’s very akin to what mining companies do, the Goldcorps of the world,” said Neufeld, of the relationship between Scythian and Aphria. “These big miners don’t have the time or the inclination to spend on opportunities that are full of risk, so they would rather let these other exploration companies go and find a mine.”
“When we were busy with Italy, Germany, Spain, Portugal, Scythian and their Rolodex were busy on Argentina, Colombia, now it’s Brazil,” he added.
Close ties between the Aphria and companies it’s dealing with have, however, landed it in hot water before. Shortly before the Nuuvera deal closed, it emerged that Aphria insiders were early Nuuvera investors, but did not disclose their holdings.
This time, Aphria appears to be taking a more proactive approach to disclosure. Neufeld stepped down as Scythian’s chief executive in April, and according to a company press release, Neufeld, Cacciavillani, Cervini, and board member Renah Persofsky “recused themselves from the meeting of directors during which the Transaction was discussed and from voting on the resolution approving the Transaction.”
As with the Nuuvera deal, however, this upcoming transaction is not without risk — something that has not always been fully acknowledged by Canadian cannabis companies eager to tout international opportunities.
“The biggest risk is political,” said Neufeld, speaking about international deals.
In February, Aphria was forced to begin divesting from Floridabased Liberty Health Sciences Inc. because the TMX Group Ltd. came down against TSX-listed companies operating in the U.S. where marijuana remains federally illegal.
Then there’s the Nuuvera deal. Nuuvera was one of a small group of finalists competing for a licence from the German government to cultivate cannabis in-country. Nuuvera’s position in Germany was the company’s “gem,” said Neufeld, which justified its steep valuation.
In March, however, a German court ordered that the government’s bidding process be put on hold, and last week the whole process was restarted.
“Had we known that that was all going to be thrown out the window, and they’re going to restart the whole process, no we wouldn’t have paid as much,” said Neufeld.
The latest deal with Scythian is subject to “a number of other closing conditions,” including Scythian closing on its target acquisitions and agreeing to a non-competition agreement with Aphria for Argentina, Colombia and Jamaica.
In addition to Aphria’s nine-per-cent stake, Scythian shareholders representing about 40 per cent of the firm’s shares have entered lock-up agreements supporting the acquisition. The shareholder vote will happen on Sept. 15.