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Part of cannabis and investing

Some of Aphria's medical marijuana plants grow in their greenhouse in Leamington, Ont., on May 26, 2014.

GEOFF ROBINS/The Globe and Mail

Green Growth Brands Inc. filed its formal bid for Aphria Inc. this week and two things are clear: This is no ordinary takeover bid, and winning over the target’s shareholders will be an uphill battle.

The terms of the hostile bid, outlined in a takeover circular, are rare – if not almost unheard of. In a normal takeover, the acquirer is usually bigger than the target; in this case, a newly created U.S. company is trying to snap up one of the largest legal cannabis growers in the world.

The math behind the purchase price is also murky. When first announcing its takeover intentions, Green Growth claimed its offer was worth $2.8-billion. But because the transaction is an all-share deal, the value is based on the price of Green Growth’s stock. The $2.8-billion value is derived from a $7 share price – yet Green Growth has never touched that value.

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“It is very perplexing on its face," said veteran mergers and acquisitions banker Brent Walker at Morrison Park Advisors. This type of merger isn’t unprecedented, he said, “but it doesn’t happen often.”

When Green Growth first announced late last month that it intended to bid for Aphria, the Leamington, Ont.-based pot producer was under siege. Short-sellers accused the company in a December report of overpaying for international acquisitions it made last summer, sending its shares tumbling and prompting some big changes at the company.

In the past month, Aphria announced that chief executive officer Vic Neufeld and co-founder Cole Cacciavillani will be standing down from their executive roles in the near future. The company has also named new financial and legal advisers in Bank of Nova Scotia and Fasken Martineau DuMoulin LLP.

In advising Aphria, Scotiabank is making its first foray into the cannabis space. On the legal side, Aphria’s hiring of Fasken is a break from long-time legal adviser Stikeman Elliott LLP, a development that comes weeks after The Globe and Mail reported the pair would cut ties. Aphria did not respond to requests for comment on the status of its relationship with Stikeman. Stikeman declined to comment.

Amid all the drama, a window was cracked open for Green Growth. In the takeover circular filed this week, Green Growth acknowledged that the short-seller reports "presented a potential opportunity.”

Its task now is to convince the scores of retail investors who predominately own Aphria that the Green Growth offer has real merit, and that the financing underpinning the bid can be executed. Aphria, for its part, has told its shareholders to refrain from taking action on the bid.

On strategy, Green Growth’s success will likely depend on selling Aphria investors on its vision. The bidder’s pitch is that it will add value by combining its management team’s deep retail roots in the United States, having served in senior roles at the likes of American Eagle Outfitters and Victoria’s Secret, with the formidable cannabis producer. Analysts at CIBC World Markets Inc. acknowledged the strategy makes sense – but added there isn’t enough of a premium to sway Aphria investors to tender.

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“We believe that ultimately this bid will not entice a majority of Aphria shareholders,” CIBC analyst John Zamparo wrote in a research note Wednesday.

The financing is a trickier matter. The offer’s $2.8-billion value was based on a valuation of $7 a share of Green Growth, but when the announcement was made, Green Growth’s stock had been trading at $4.98. To bridge the gap, Green Growth said it expected to complete a $300-million financing at $7 a share – which would presumably boost the stock price.

At the time, Green Growth promised that it would soon provide more financing details. The formal bid this week only complicated matters. The suitor revealed that it has lined up All Js Greenspace LLC to buy up to $150-million of the financing, yet All Js Greenspace is closely tied to the Ohio-based Schottenstein family that created Green Growth.

All Js is also already Green Growth’s largest shareholder, which means the suitor’s backers have simply promised to buy more stock if they acquire the lucrative target.

While rare, such a tactic has been seen before: In Amaya Gaming Group’s acquisition of PokerStars' parent company. (A spokesman for Green Growth declined to comment on the takeover terms and to discuss the Schottensteins' connection to All Js.)

When Amaya announced the US$4.9-billion online poker takeover in 2014, its revenues were roughly one-tenth that of target Rational Group Ltd. To pull the deal off, Amaya lined up US$3-billion in debt financing, and also got commitments from investors to buy shares in an equity financing.

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However, that was possible, said Mr. Walker, the mergers and acquisitions banker, because the two firms had good reason to come together. “In situations like that, investors are looking at the pro-forma company," he said. PokerStars was a giant, but it had gotten into legal trouble and had been shut out of the U.S. market; selling to a Canadian company made it seem much friendlier.

That Green Growth is using Amaya’s takeover strategy makes sense, considering that Canaccord Genuity served as both companies' lead financial adviser. Yet this time the investment bank seems to have a tougher sell.

For one, the Amaya deal was a friendly deal, not a hostile takeover. And in that transaction, the major investor supporting the transaction, Blackstone Group, was fully independent – not an insider. Canaccord could not be reached for comment.

But Green Growth’s bid is open until May 9, and the cannabis sector has proven that a lot can change in short period of time.

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