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Short-seller sounds warning over Aphria-Nuuvera deal

An Aphria worker looks out over a crop of marijuana in an undated handout image

HO-Aphri/THE CANADIAN PRES

A short-seller is raising red flags over Aphria Inc.'s purchase of Nuuvera Inc., adding to pressure on their shares just a day before a deal marrying the two marijuana companies is to close.

On Jan. 29, Aphria announced an $826-million deal to acquire Nuuvera, paying $8.50 for each Nuuvera share, mostly in stock and some cash. In February, after cannabis stocks took a tumble, Aphria moved to slash the cash portion of the transaction from $1 a share to 60 cents. The deal is worth slightly less than $430-million, as of Thursday's close. The transaction is set to close Friday.

In a report published Wednesday on investing forum SeekingAlpha.com, an account called Hindenburg Research questions the value of Nuuvera's business and raises concerns about ties between key Nuuvera and Aphria stakeholders. The post claims that the Nuuvera acquisition "would represent a substantial drag on the entire enterprise" and "raises questions about Aphria's aggressive deal-making spree in general."

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Shares in Brampton, Ont.-based Nuuvera fell 5 per cent on Wednesday to $5.67. Leamington, Ont.-based Aphria's stock dropped 4.5 per cent to $13.85. Shares in Nuuvera fell a further 5 per cent on Thursday while Aphria sank 3 per cent amid a broader decline in the sector.

While no author was attributed, the 12-page report is the work of Nate Anderson, the chief executive officer at U.S.-based hedge-fund research firm ClaritySpring Inc. Mr. Anderson disclosed that he has bet against shares in Nuuvera and stands to benefit when the stock price falls. Short-sellers are piling into Canada's cannabis sector, betting on an impending price correction after a trading frenzy has pushed the valuations of many startups with little to no revenue into the hundreds of millions – and even billions – of dollars.

"This whole deal reeks," Mr. Anderson said by phone Wednesday. "Nuuvera has almost no revenue – and its greatest asset seems to be its ability to hype itself. Potential conflicts need to be disclosed."

Representatives from Nuuvera did not respond to a request for comment.

In his report, Mr. Anderson points to the business dealings of Andy DeFrancesco, an early investor in Aphria through his family fund and a special adviser to the company.

In a post on his personal Instagram account after the Nuuvera deal was made public, Mr. DeFrancesco refers to himself as "the architect in bringing these 2 great brands together."

Mr. Anderson notes that Mr. DeFrancesco has financial ties to Nuuvera's chair, Ronald Schmeichel. In a 2017 Florida real estate deal, his family's firm received a loan from a company of which Mr. Schmeichel is chair.

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"It has nothing to do with Nuuvera," Mr. DeFrancesco said Wednesday in a phone interview, adding that the loan has since been settled. "It's not relevant."

In addition to owning a stake in Aphria, Mr. DeFrancesco, through his family firm Delavaco Group, was also an early investor in Nuuvera, buying into the private company when it first raised outside capital. He said his family's investment came before Aphria acquired its stake. Aphria first announced a $2-million equity investment in Nuuvera in August as part of a partnership with the company.

"I've had a relationship with these guys, Aphria and the Nuuvera guys, because we've done many transactions over the years and we've made lots of money together," he said.

On Wednesday, he played down his Instagram post, saying that he brokered an introduction between the two sides. A spokesman for Aphria said "the acquisition of Nuuvera was engineered by Aphria management."

Mr. DeFrancesco said that while he may bring ideas forward to Aphria's executives, most of them don't pan out. Even though his family's firm has a financial stake in both companies, he added that both boards approved the deal and that investment banks offered fairness opinions on the transaction's terms.

Mr. Anderson's report raises questions about who stands to benefit from the Nuuvera deal, and whether that information was disclosed to Aphria's investors.

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Because he isn't an officer or director of the company, Mr. DeFrancesco isn't considered an insider in Aphria. But an Aphria spokesman confirmed in an e-mail Wednesday that a number of Aphria insiders participated in the initial financing round for Nuuvera when it was a private company. The spokesman said those insiders owned 0.9 per cent of Nuuvera on a fully diluted basis, but did not respond to further e-mails asking to identify the insiders and their holdings.

The spokesman also did not address questions regarding the claims made in the short-seller's report.

Nuuvera went public on the TSX Venture Exchange on Jan. 9, closing on its first day of trading at $5.96. The company's rise has been explosive, buoyed in the early days by its close ties to Aphria.

"We cannot see the economic rationale behind paying hundreds of millions of dollars to acquire what largely amounts to a loose agglomeration of early stage initiatives and plans," Mr. Anderson wrote in his report.

In Canada, Nuuvera owns a company that has applied to for a licence to grow cannabis, as well as another marijuana firm with a dealers licence that has been conducting research for third parties. It had entered into a five-year supply agreement with Aphria and last August bought half of the 200 acres Aphria owns in Leamington for $4-million to build a greenhouse.

Nuuvera was going to pay Aphria 8 per cent of the cost to design and build the facility in exchange for advice. Then, Nuuvera was going to get Aphria to grow cannabis once its Leamington facility was built, paying for Aphria's costs and 10 cents a gram.

It also had plans to expand into other medical cannabis markets around the world, such as Germany, Italy, Israel, Malta and South Africa.

In early February, Aphria CEO Vic Neufeld told The Globe and Mail about his plans to launch another business called Aphria International, which would focus on serving medical marijuana markets outside Canada and the United States. At the time, Mr. Neufeld was not sure if Nuuvera's global assets would be spun out into the new company once the deal with Aphria was finalized. He said Aphria International would look to complete a reverse takeover of a public company in mid-February.

Aphria, which has a market cap of more than $2-billion, is one of several large Canadian growers that has used a surging share price as currency in deals, becoming a consolidator in a crowded industry. It has also become a portfolio manager, buying shares of other marijuana firms that have also seen their valuations soar.

In many of those investments, Delavaco has also invested before or at the same time as Aphria, Mr. DeFrancesco said.

According Mr. DeFrancesco, Delavaco invested in Florida grower Liberty Health Sciences Inc. before Aphria. Mr. DeFrancesco was also an early investor in 242 Cannabis LLC, a firm Liberty recently agreed to acquire. He says he invested in Kalytera Therapeutics Inc. and Scythian Biosciences Corp. at the same time as Aphria.

"That is called having a strong Rolodex, because you've done a lot of successful deals over the years and people trust you and they come to you because of your judgment," Mr. DeFrancesco said.

"Aphria's success means way more to me, my family and our partners than what we would ever be able to make on Nuuvera. Aphria, as far as I'm concerned, is my baby. It means a lot."

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