We often receive information and rumors from industry sources about what might be going down in the industry.  We do not relay these rumors, as trading on rumors can create bag holders (See: Aphria and Altria), and we want investors to trade on fact versus speculation.  

Trading on rumors is more than speculation, it is gambling without knowing the odds. And for folks that believe in fundamental operations… we are not big on gambling.

We had heard about MedReleaf being on the block before it was reported, we heard that Aphria and Aurora were in talks a week before the story broke.  Heck, I heard Aurora and Aphria were in “talks” in 2018 before the Nuuverra deal.  In all cases we did not report it, or trade on it, because it is not a deal until both parties agree.

As we have mentioned here, on our subReddit and on the podcast… investors should expect deal making talks behind the scenes given the state of finances and operations most companies are evidencing.  This is natural course, especially in market where companies are not getting the traction they need for long term survival.

Companies are going to talk. And the companies with the biggest bank accounts are going to be mentioned the most: Canopy, Cronos and Aphria.  This is natural course. 

Will the “talks” lead to anything? In the majority of cases… no.  It takes two to tango and it takes more for both sides to get married.

Molly recently penned “Canopy’s Next Move” suggesting that an Aphria acquisition might indeed fix some of Canopy’s core issues, but that Village Farms (or their wholly owned subsidiary Pure Sun Farms) might be had at much less of a purchase price and provide similar improvements.

I have heard from multiple industry sources that there were indeed talks between Canopy and Aphria (and to be clear, these sources are not with Aphria or Canopy but are well embedded in the industry grapevine).  There were also “confirmed talks” between Aurora and Aphria, but the combination of these companies is far less compelling than Canopy acquiring Aphria, at least in my opinion.  

As these sources both confirm the Canopy and Aphria deal is NOW dead, I thought I would provide some colour.  Again, take this with a massive grain of salt.

The “details” (if you can even call them that) are that Canopy was offering an all share deal for Aphria at C$ 9.00 a share on floating basis tied to CGC share price (ie. A fixed ratio of Aphria share price to CGC share price) which would have been a +33% premium a week ago to Aphria share price. The premium seems in the ballpark of realistic.

What the rumor is that derailed the rumored deal was that CGC was guiding to a loss in the September 30, 2020 Q that, IF TRUE, would require more impairments to achieve.  Put another way, the loss I have heard that derailed the deal is above any operational loss that Canopy should report this Q and would require further impairments. The rumored loss is mid to low nine figures.

This acquisition would have closed on the other side of that earnings report.

The thinking being… Aphria walked because the loss would drive down CGC shares making the conversion less favorable to Aphria shareholders.

I am not sure if that guided loss would have included impairments to CGC production assets and inventory, which would likely occur post-merger to right size the combined entity.  As I am not an accountant, I do not know if those type of adjustments would occur or be flagged in advance of a deal closing. 

(I look back at the High Tide and META merger and META delayed filing financials until after the deal was announced and META performed a sizeable “clean up on aisle 4” to their financials despite financials being dated May 31, 2020 and the acquisition coming well after.)

I am actually of the opinion that the merged entity would create retail investor hysteria and move the stock higher.  Fundamentally does Canopy have unexploded landmines?  Sure.  But so does Aphria (inventory writedowns).

The Aphria Aurora merger “reportedly” broke down because they could not agree on board make up and compensation.  Sure!  It was not the crippling debt, SGA and over capacity that combined company would have that derailed Aphria and Aurora merging but failing to compensate board members. Right.  Gotchya!

What I am getting at is … it is fun to think of what mergers might do operationally and to share price.  Talks are going to happen, and most c-suites would not be doing their job if they were approached and did not kick the tires.  If it does surface publicly that they talked, expect another rumor from a source as to why the two could not reach an agreement.  That is the nature of the beast, as we will likely never know what really happened and the true reason for not moving forward is almost never publicly disclosed by the parties.

If you are an investor that wants to gamble on rumors… have at it.  But if you want to invest on fundamentals well…  Aphria would improve Canopy in many dimensions and likely accelerate the time horizon to profitability, but it would not magically fix all of their issues as Aphria has some of their own baggage they need to work through.

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author has a position in Aphria and will not start one or divest in the next five days. The author has no position on CGC or ACB or VFF and will not start one or divest in the next five days.