Green Growth Brands Launches Aphria Bid: Dmitry Zaytsev on the Not so Hostile Takeover Deal

Analyst Dmitry Zaytsev discusses the recent official Aphria Inc (TSE:APHA) (NYSE:APHA) (FRA:10E) takeover bid tabled by Green Growth Brands Ltd (CNSX:GGB) (OTCMKTS:GGBXF). Zaytsev has concerns about a number of aspects of the GGB offer. Zaytsev takes issue with GGB’s financing history, especially its agreement to pay All JS Greenspace LLC, which is helping to finance the capital raise to acquire Aphria, a commitment fee of $7.5 million if the deal does not go through. Most troubling for Zaytsev is the lack of transparency about the existing relationships between the two companies. He reveals that an Aphria subsidiary, GA Opportunities, is one of the largest shareholders in GGB, holding a 10 percent stake. GA Opportunities has partnered with All JS Greenspace LLC, a Schottenstein family holding that is financing the takeover bid, to create Schottenstein Aphria LLC. In addition, All J sold a pharma shell into Schottenstein Aphria LLC, which then used an RTO to launch Green Growth Brands. Zaytsev concludes the proposed deal will result in an automatic dilution for Aphria shareholders.

Transcript:

James West:   Dmitry Zaytsev is here. Dmitry, welcome back.

Dmitry Zaytsev:    Nice to see you, James.

James West:   Nice to see you, too. That’s so weird, they just walk you on the set while I’m talking to Margot. I can’t say hello, I can’t shake your hand –

Dmitry Zaytsev:    Tight schedule today.

James West:   Tight schedule, is that what it is? I guess, yes. So we were going to talk about you’ve been following very closely the potential merger I think we’re going to restrain the conversation to of the potential merger between Aphria and Green Growth Brands, acquisition of Aphria by Green Growth brands, in and all-spot deal, and so they’ve made an announcement today where Aphria is positioning itself as, at least management is advising its shareholders not to do anything, and Green Growth Brands has more or less made official its offer, which remains inadequate relative to what was said by Aphria management previously. What is your take on all of this?

Dmitry Zaytsev:    Yeah, so looking through all the filings, as you know, I’ve been following a lot of these, this little dog and pony show for a while, and I think this was just Green Growth Brands’ their official sort of offer submission, previously they were just talking about it; this is the official submission that they talked about in December.

So I’ve been digging into a bunch of information on this, and with a friend of mine, he wanted a shout-out, Eric, helping me out a little bit here in the due diligence process, but we found some interesting, I guess, irregularities in terms of the structure of Green Growth brands and the interrelationship between Aphria and a couple of key players, I guess you could say.

James West:   Sounds very intriguing. So now so when you say relationships, are you implying that there was a relationship prior to the announcement of the acquisition?

Dmitry Zaytsev:    Yeah, absolutely, and the relationship not just a month or two; this goes back years, actually. And I’ve actually brought a little bit of a deck to walk you through maybe seven or so slides that show some interesting things.

James West:   All right, let’s do it.

Dmitry Zaytsev:    So this is from the offer, this is from the initial offer. So first of all, just talking about the offer, it’s very rare to have a company offer shares above its market price and at a discount to the current valuation. I’ve never seen, or it’s probably so rare that it’s 1 percent of occurrences. So this is right off the bat a suspicious thing.

James West:   So you mean with Green Growth saying we’re going to take you out, our stock is going to be $7 a share by then even though it’s only $4.25 now.

Dmitry Zaytsev:    Yeah, it’s ridiculous. And doing a financing at a higher price, a significantly higher premium, that’s very rare. But so going back to this actual slide deck, you can see that they secured a $150 million investment from All J, it’s called, and Green Growth has agreed to pay the investor a commitment fee equal to $7.5 million, payable by issuing proportionate voting shares to the investor.

So now they’ve said they’ve locked up $150 million, but they have this little covenant where they’re paying them if the deal doesn’t go through, h is very, very unorthodox, I guess you could say.

So that got me kind of thinking, so I looked into All J, and if you know, you just keep it on the slide deck, honestly, they actually shared the exact share office, these All J guys, so this top thing is from the actual press release, and then this is from Green Growth Brands’ website – they actually share the same address. Which is very interesting.

So a company that is going to be the key investor for $150 million, is sharing the same address as the company they’re investing in.

James West:   So you mean, when you say the same address, do you mean the same building, or it’s in the actual same suite in the same building.

Dmitry Zaytsev:    It’s identical. It’s the same building, I think it’s a different suite but it’s in the exact same building, and $150 million, Ohio, you know, I think that’s a little suspect.

James West:   So then, I mean, okay, let’s step back from this. Who is potentially hurt by a, you know, a closer relationship than is actually disclosed?

Dmitry Zaytsev:    Well, I think it’s one of those things we’re going to see later on, where I guess having a showing of this, you know, acquisition, hostile takeover sort of thing, when it’s actually not, when it’s actually a lot more friendly, and executives, for example, I know Vic was on the Board of Green Acres on their website; they removed that. There’s a lot of sort of lack of transparency which you know, to me, as a potential investor, is very concerning. And so for me, you know, I’d rather, cannabis is already a high-risk investment, so I’d rather see a very clear path and a very clean structure with a lot of these things.

So, just going further, All J, so the same company that’s doing the 150 million acquisition, or investment, they also purchased the shell which Green Growth Brands was RTOd into. And they actually gained a pretty sizeable share position already, even before this investment. So if you look on Google or any other filings, there’s no mention of it doing any other filings, doing any other kinds of investments before this November 12^th press release. So to me, you know, I did some more digging. That’s what we do: we do digging. And so if you pull up the next slide, you see the top two investors currently, so going back to what I said, is All J, which represents about 20 percent, and Green Acre opportunities Corp., which is an Aphria subsidiary. And together they make up 30 percent of the actual ownership structure.

And so you say hmm, okay.

And so this is just showing the next slide here that the group, GA Opportunities, this is on their MD&A, on Aphria’s MD&A. You can find it on every quarterly filing, they talk about all the stuff they do, this is just to show you that they’re related, obviously.

Next, so we actually looked into this, and –

James West:   So, wait a sec: Aphria already owns Green Growth Brands?

Dmitry Zaytsev:    So they own a 10 percent stake through their GA opportunities. So they already own 10 percent of it, so it’s kind of strange to have them own a subsidiary and then is taking them over in a hostile bid. So going further to the next step – you know, I’m sorry I’m taking the –

James West:   But we want to impress with the depth of your research, here, by all means.

Dmitry Zaytsev:    Yeah, and so interestingly, the one thing I did find in terms of filings, All J Green Space was incorporated in Ohio in an LLC there, there was an agent, and his name is Mr. Friedman. And we found him on LinkedIn, and it turns out he’s part of the Schottenstein Property Group.

James West:   So it sounds to me like you’re concluding that there’s a great deal of interconnectivity that is not necessarily properly disclosed, that might cause one to question the legitimacy of some of the disclosures representing that this is an unsolicited bid and an arms-length transaction. So that’s pretty serious stuff, and interesting, but certainly, the cannabis space has been, you know, tarred a little bit with some of these, you know, not properly disclosed transactions that ultimately constitute self-dealing to directors and insiders at the expense of retail shareholders. Is that a fair assessment?

Dmitry Zaytsev:    That’s very fair, and the one concerning thing is, a lot of those issues you w referring to that have tarred the cannabis space have come from this one company.

James West:   Okay, so what’s the play here? Is there – it’s not to go long Green Growth or short Aphria or vice-versa, is it?

Dmitry Zaytsev:    It’s really tough to actually short Green Growth Brands in all this. I think this is one of those things where you just stay away, you let things do, you know, sort themselves out. Personally, I’m not taking any kind of positions right now, and many of my friends and colleagues are also not doing so.

James West:   Okay, so let’s say that I don’t care about the optics and I don’t care about the non-disclosed relationships; I’m just looking at the fact that okay, so if there are insider relationships but the optics have to satisfy the regulators and the regulations, so therefore, if I’m an Aphria shareholder who is otherwise uninterested in any other aspect, I’m just an Aphria retail shareholder, I want maximum dollar for my share if somebody is going to take me out. I’ve seen Aphria stock at $20 before; I don’t know why it’s not there now, except for maybe all of the negative press.

So is it the Aphria shareholder who’s going to drive Green Growth Brands to tender a higher offer, or to propose a higher offer price, which suggests that really we should be buying Aphria, and arguably, we should be buying Green Grown brands, because if it’s the same guys pulling the strings on both sides, they have the ability to move the price where they want it to.

So isn’t there an easy win here on the long side of both companies?

Dmitry Zaytsev:    I’ll say one thing that Aphria does have real assets in Canada, absolutely; they’re impressive assets, you know, Leamington, I’ve had some friends tour those facilities, they’re very impressive, and I mean, they do have product out, and all of that. But that said, the way this structure is actually set up, and we’ll see later on as well, is because these various group[s have a position already – so All J already has a 20 percent issuance, or sorry position, in Green Growth brands, by acquiring Aphria, they’re actually diluting their current shareholders, because they’re giving them paper, right, the stock, the Green Growth brand stock, which there’s really not a lot behind, right? There’s really just a bit of financing, and we can argue about it, but there’s really not a lot behind versus some of these other MSOs. And so in essence, it’s an automatic dilution of Aphria shareholders by at least 20 percent, and this I before their 150 million investment.

So in essence what they’re going into Aphria at a much lower price and diluting the current shareholders, so that’s why you should care.

And so going back to these decks, I do want to finish it up before we end this interview or, you know, talk about other things, but All J, this Schottenstein’s property group individual, what’s interesting is, there’s an article if we can go to the slide, from 2017 where it kind of sounds familiar: Officials from a Canadian Medical Marijuana company say they partnered with a Columbus family known for fashion retailer American Eagle and DSW. Where I think I’ve heard that before somewhere, and this is from more than a year ago.

And the other thing I would just note is the Schottenstein Aphria LLC is one of the 185 companies.

James West:   So there’s a company called Schottenstein Aphria LLC?

Dmitry Zaytsev:    Yes.

James West:   [laughter] That’s pretty blatant. That’s a new form of disclosure, we’ll just name everything after ourselves.

Dmitry Zaytsev:    Yeah, I mean, they just put it out there. Look: Schottenstein, Aphria, LLC, this gentleman who heads the Schottenstein group which incorporated All J, which got the Xanthic or whatever the shell to get Green Growth Brands and is also a 20 percent investor currently, and is doing the next $150 million round.

So if you put it all together, right, this is what it kind of looks like, and honestly, I just put this together right now, like an hour ago. So mind the formatting, but in essence it’s, Aphria owns, you know, GA Opportunities; Schottensteins own the All J, and together they make an investment into Schottenstein Aphria LLC, right, and All J also sells this Xanthic, whatever, pharmashell, to a Schottenstein LLC, and then they RTOd into Greeen Grown Brands, which is now acquiring Aphria.

James West:   And how many shares, then, does Shottenstein and Company control of Green Growth Brands? That’s the –

Dmitry Zaytsev:    No, no, no, that’s the All J guys, and they got a good chunk of it through the RTO because they had the founders’ shares of the shell.

James West:   Wow.

Dmitry Zaytsev:    So they currently, before their $150 investment, already owned 20 percent of GGB.

James West:   Wow. Interesting, and fabulous investigative work. Than you very much for filling us int here Dmitry. We’ll come back to you again, and by all means, keep up the good work.

Original article: Green Growth Brands Launches Aphria Bid: Dmitry Zaytsev on the Not so Hostile Takeover Deal

©2019 Midas Letter. All Rights Reserved.