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Streetwise Aphria begins retreat from U.S. medical-marijuana market

Medical marijuana plants are seen in Aphria’s greenhouse in Leamington, Ont.

GEOFF ROBINS/The Globe and Mail

Aphria Inc. is taking steps to pull back from the U.S. medical-marijuana market as it moves to fall in line with Toronto Stock Exchange rules.

For Aphria, retreating from the United States will be complicated. Chief executive officer Vic Neufeld said a subsidiary of the Leamington, Ont.-based company is looking to divest its non-controlling stake in private Arizona medical-cannabis producer Copperstate LLC. It is planning to sell its position of about 14 per cent to Liberty Health Sciences Inc., a public Florida-based grower that is closely linked to Aphria. Aphria confirmed that sale Friday at a price of $20-million.

Aphria's decision to start offloading U.S. assets would move the company closer to being onside with a new listings policy set by TMX Group Ltd. in October.

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It would also make Aphria, Canada's third-largest public cannabis company by market cap, more attractive to potential partners or suitors amid a strengthening wave of consolidation in the nascent sector.

On Wednesday night, special committees for Aphria and Liberty negotiated terms of the sale after having received fairness opinions from two investment banks – Haywood Securities Inc., for Aphria, and Clarus Securities Inc., for Liberty.

The two sides have all but agreed on a price and Mr. Neufeld expects that Aphria will "at least be doubling our money" on the Copperstate sale, he said. However, the transaction has not yet been finalized and it requires approval from the controlling shareholders of Copperstate.

In addition, Aphria has put a slice of its position in Liberty on the block. Aphria owns roughly 38 per cent of the common shares in Liberty, which is listed on the Canadian Securities Exchange and has a market capitalization of $427-million.

Aphria is planning to sell about 25 per cent of its stake in Liberty, which it acquired for around 23 cents a share, Mr. Neufeld said. The rest of its position remains restricted for up to another two years.

There were multiple bidders for the block, Mr. Neufeld said, adding that talks with a strategic and long-term buyer are moving into the final stages. Mr. Neufeld wouldn't name the potential buyer, but said it is group of family funds that have long been Aphria investors.

Shares of Aphria fell 12 per cent to $15.48 on Thursday, while Liberty Health's stock plunged 15 per cent to $1.50.

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"To realign things makes so much sense, to move into good hands our Liberty shares and get out of the cloud that the TSX has cast on many of us with U.S. assets," Mr. Neufeld said. "In our opinion, there are a number of international or U.S. funds that see this passive investment in Liberty as restricting their ability to invest in Aphria. And so this is unshackling some perceived value. Let's now purify."

This week, Aphria announced a deal worth $826-million for Nuuvera Inc., a cannabis company that is pushing into parts of Europe, Africa and the Middle East. And Aphria hasn't yet closed a previous deal, the $230-million purchase of B.C.-based grower Broken Coast Cannabis Ltd.

The decision to sell key U.S. holdings is a sign of a major strategic shift at Aphria. In an interview late last year, senior Aphria executives were adamant about the value and potential for these U.S. assets to Aphria's shareholders, even saying that they were open to moving Aphria's stock listing off of the TSX, Canada's largest exchange.

"Copperstate, Arizona is an absolute home run. Beautiful growth, all medical and it fit like a glove with the Aphria story," Mr. Neufeld said late last year. "Florida is the premiere state. It's the one you want to be in and we're in it. And that's good for our shareholders."

While certain U.S. states, including Arizona and Florida, have eased restrictions on cannabis, the drug is still prohibited under federal law. This has created confusion over the legal risks of doing business south of the border.

Last October, the TSX threatened to delist marijuana issuers that are in breach of U.S. federal laws, setting up a standoff with Aphria as the TSX conducts a review of the entire industry. Aphria has said that its most-contentious U.S. assets in the eyes of the TSX were Copperstate and Liberty Health.

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Canadian securities regulators have taken a different approach, deferring the decision over what can and can't be listed to stock exchanges.

Last month, the Canadian Securities Administrators said it is reviewing a policy that allowed marijuana firms with U.S. operations to go public in Canada, as long as these companies disclosed the legal risks they face in the United States. This review came after the rescission by U.S. Attorney-General Jeff Sessions of an Obama-era policy that allowed cannabis to flourish at the state level.

Although Aphria is taking steps to reduce its financial stake in Liberty, the ties between the two companies are still strong.

Liberty will still have access to Aphria's low-cost growing methods and Aphria will have a branding presence in parts of the U.S. medical-cannabis market, Mr. Neufeld said. Mr. Neufeld will remain the chair of Liberty's board and Aphria co-founder John Cervini will continue to be a director at Liberty.

With Liberty, "the Aphria brain trust, the Aphria I.P. [intellectual property], the Aphria commitment continues. That's why I want Liberty to buy Copperstate,"Mr. Neufeld said. "We continue to have our fingerprints all over this."

He added that these potential asset shuffles are part of a bigger plan.

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Mr. Neufeld said Aphria is planning to launch a new business this month called Aphria International. The proposed company will focus on growing and selling cannabis for patient use outside Canada and the United States, including across Europe, Africa, Latin America and the Caribbean. This is set to be a separate public company, coming to market through a reverse takeover in mid-February of an entity listed today on the TSX Venture Exchange.

"There are a lot moving parts. At the end of this journey, we will have three corporate entities so that investors can then decide for themselves," he said. "Do they just want to stay at home, park their investment dollars in a Canadian landscape? Or, do some want to venture out and put some investment money in the U.S. marketplace called Liberty? Or, do they want a standalone international play?"

Liberty, for its part, is eyeing a transaction of its own that could see it gain exposure to medical cannabis in at least four more U.S. states, Mr. Neufeld said.

He remains hopeful that cannabis will become legal at the U.S. federal level within the next two years, meaning Aphria wouldn't have to offload its entire stake in Liberty.

"When the rules change in the U.S. and it happens before we make another block trade, let me tell you, we're not going to dispose of the remaining [Liberty shares]," he added. "If the TSX rules marry up to new U.S. medical legalization federally, I am not going to transact the remainder of my Liberty shares."

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