Aphria Confirms Sale of Remaining US Asset

Canadian licensed producer Aphria (TSX:APH) announced on Thursday (September 6) a deal to sell its remaining shares in US-focused multi-state operator Liberty Health Sciences (CSE:LHS).

The deal will see the sale of over 64 million shares from Liberty to a separate group of buyers. Aphria said this move will improve its liquidity.

“Not only does this transaction result in a significant gain to the Company it also enables Aphria to advance its existing global strategic plan unencumbered by US exposure at this time,” Vic Neufeld, CEO of Aphria, said in the release.

Neufeld didn’t shy away from saying Aphria would be involved in the US cannabis market again, stating the company believes in the opportunity there. “We intend to be a significant player in the US cannabis industry at the appropriate time in the future,” Neufeld said.

Shares of the two cannabis companies quickly rose during Thursday’s trading session following the split. Shares for Liberty closed with a 6.45 percent rise, reaching a price of C$0.99.

Similarly Aphria recovered from an early trading dip and reached a price tag of C$21.35 after the markets close, a 15.53 percent increase from its previous close. The producer still touts a market cap valuation of C$4.63 billion.

Aphria confirmed the buyers will acquire all the shares of Liberty for a “five-year promissory note due September 6, 2023 bearing interest at 12 [percent] per annum,” for close to over C$59 million. The company will also retain an option to buy back all the shares for up to five years.

Aphria enters and backs out of US market due to TMX clash

In April 2017, Aphria launched a US division of its own through Liberty’s debut. At the time of launch, the plan for the company was to operate under the brand name “Aphria USA.”

The TMX Group then issued a new guidance, indicating companies operating cannabis businesses south of the border would infringe in US federal law and could face delisting from Canadian exchanges. The ruling applied to significant assets as well.

In the US, cannabis remains an illegal drug on a federal level. States have been allowed to set up their own regulations on the drug; nine states and Washington, DC have legalized cannabis in some form. Some states have even added recreational options for consumers.

However, due to the federal ban on cannabis, the TMX Group retained its stance on blocking Toronto Sock Exchange (TSX) and TSX Venture (TSXV) listed companies from operating or owning assets in the US with direct interaction to the growth of cannabis.

Aphria dragged the issue with the regulator until February 2018 when the company outlined a strategy to divest its US assets, including a stake in Arizona cannabis producer Copperstate Farms.

Liberty continues Florida operations and public listing

Liberty has continued to conduct its business as a public company trading on the Canadian Securities Exchange (CSE), an exchange that has embraced companies and operators with business in the US.

The company is embedded into the Florida market, selling medicinal cannabis through its retail dispensaries in the state. Momentum has also been rising in Florida for the inclusion of a recreational legalization vote on the upcoming 2020 election ballot.

On Thursday, Liberty shared its financial results or the three-month period ended on August 31. The company reported US$2.2 million in revenue for the quarter, representing a 95 percent increase from its previous quarterly result.

George Scorsis, CEO of Liberty Health Sciences, said the company is focussed on diversifying as it looks to expand operations in Florida and outside the state.

Investor takeaway

The cannabis public market has been kicked into high gear as speculation grows for the entry of alcohol producer Diageo (NYSE:DEO). Aphria earned a leading position among the rumored companies due to its connection with the alcohol company through a former employer who is now an Aphria executive.

In his weekly newsletter to investors Alan Brochstein, cannabis analyst with 420 Investor, wrote the Diageo entry might not be an outright acquisition and may be a partnering act similar to the one Molson Coors Brewing (NYSE:TAP,TSX:TPX) did with HEXO (TSX:HEXO).

“[T]here is no doubt that many companies are trying to get their cannabis strategy locked down now,” Brochstein wrote.

Similarly Doug Waterson, CFO and Portfolio Manager with Faircourt Asset Management and Manager of the Ninepoint UIT Alternative Health Fund told the Investing News Network (INN) investors should be prepared for the eventual entry to separate itself from previous ones in the space.

“I think investors should keep in mind that a transaction with a beverage company could take many forms… there are lots of other ways for the companies to work together that might not have that same impact but [can] still be meaningful,” Waterson said.

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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.