APHQF Stock: Can Aphria Stock Regain the Value Lost to the Nuuvera Deal?

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Why Aphria Stock Tanked 17% in a Week

Marijuana stocks have not been doing too well lately. Stock prices have shed nearly half of their value attained during the December 2017 rally. One top marijuana stock, however, has dipped much deeper than its peers. Aphria Inc (OTCMKTS:APHQF, TSE:APH) plummeted more than 17% this week.

What exactly is causing this sell-off, and should it scare you as an investor? Those are the questions I’ll address below.

Aphria recently revealed its grand plan of global expansion, which is partly being made possible due to its recent takeover of Nuuvera Inc (CVE:NUU). But the market is not too happy with Aphria management’s quasi-disclosure ahead of the deal.

Aphria acquired the Ontario, Canada-based marijuana company last month. Everything was going well until news broke that Aphria insiders had failed to disclose their ownership stakes in Nuuvera prior to the purchase. The insiders, who had bought Nuuvera stock for an average $1.00 apiece, will now be receiving more than four times the price they paid.

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On a cursory look, it seems like the management teams on both two sides of the deal deceived the market by holding back this critical information. The stock sell-off that took place following this news goes to show that stockholders are not happy.

Chart courtesy of TradingView.com

However, there may have been no foul play here. Management was never required to disclose this information, so they let it slip under the radar.

Had the acquisition taken place through the conventional process of bidding, the insiders would have had to disclose their positions. But the acquisition went down as a court-supervised “plan of arrangement” which afforded leeway to Aphria’s management. (Source: “Aphria, Nuuvera deal prompts questions about disclosure rule gap,” The Globe and Mail, March 27, 2018.)

As investors continue to have doubts about this acquisition, Aphria is doing its best to put the skepticism to rest. A day after the news broke, Aphria revealed the economic reasoning behind this acquisition.

Aphria has announced plans to rename Nuuvera as Aphria International, which will become a wholly-owned subsidiary of Aphria Inc. As is obvious from the name, this new entity will focus on Aphria’s global expansion, which is what underpinned Aphria’s interest in Nuuvera in the first place.

Nuuvera boasts strategic advantage over Aphria in a number of emerging marijuana markets, most notably Germany and Italy—in addition to smaller markets like Lesotho and Malta. Taking Nuuvera under its wing would boost Aphria’s exposure to these markets, bringing it at par with its bigger peers Canopy Growth Corp (OTCMKTS:TWMJF, TSE:WEED) and Aurora Cannabis Inc (OTCMKTS:ACBFF, TSE:ACB).

On top of that, the acquisition of Nuuvera grants Aphria some local benefits. For instance, Nuuvera owns a Good Manufacturing Practice (GMP)-certified laboratory for processing cannabis, which will now become a part of Aphria. It will improve Aphria’s capability to produce export-quality strains.

So, Aphria is not just spinning its wheels as naysayers would have you believe. This deal with Nuuvera may have been a calculated, pragmatic move.

Analyst Take

Bear in mind that the Canadian marijuana industry is consolidating at a rapid pace. Mergers and acquisitions are happening left, right, and center as we close in on Canada’s legalization day. Some acquisitions will certainly raise questions on their viability, but this shouldn’t necessarily be one of them.

The Aphria-Nuuvera marriage may have mostly rewarded the insiders now, but  the rest of the stockholders may likewise benefit from the merger in due time.

I expect investors to not lose sight of the big picture, where Aphria shines bright as one of the only profitable companies in the marijuana industry, having some of the lowest production costs.

Aphria’s growing North American strength and rapid international expansion further solidify its position as one of the industry leaders. So I’m not losing hope in this top marijuana stock just yet.