For a more in-depth review of what this news means for Aphria’s stock, click here.
Shares in Aphria (TSE: APHA) increased 6.6% premarket after a third-party investigation into its acquisition of LATAM assets was “within an acceptable range”.
The firm came under attack in early December as it was targeted by short seller Gabriel Grego with a reverse pump and dump that sent the stock into a tailspin. His report, backed by Nate Anderson at Hindenburg, was given short shrift by some analysts and Aphria’s share price has recovered from C$5 on Dec. 5 to north of $12 now.
Shares closed at C$12.05 yesterday and opened at $12.85 today after Aphria announced the conclusion of the special committee review this morning. It decided that the amount Aphria paid for assets in Colombia, Argentina, and Jamaica was within an acceptable range compared to similar acquisitions by competitors.
The Quintessential Capital Management report accused Aphria of paying C$280 million for assets it called “worthless”, alleging that it allowed the firm to divert upwards of C$700 million through copious and dilutive share issues.
An Acceptable Range
The report wiped almost 40% off the value of Aphria’s stock, but the board always maintained its confidence in the process leading to the acquisition. It emerged that Grego had conducted a hatchet job on Aphria, with suspect due diligence and no financial analysis, using deceitful representation to secure witnesses and purposeful omissions to bolster the negative narrative he was putting forward, while ignoring audited financials, Aphria’s Canadian assets, and its $300 million in cash.
None of the report’s allegations have stood up to scrutiny, and now the third-party committee has poured further scorn on it. This special committee conducted site visits in Colombia and Jamaica and worked to confirm the arrangements in place. It concluded that “the consideration paid for the assets purchased in the acquisition was determined to be within an acceptable range as compared to similar acquisitions by competitors, be it near the top of the range of observable valuation metrics”.
Improving Corporate Governance
The special committee laid down several recommendations to help Aphria improve management practices and corporate governance going forward. They include ensuring the board consists mainly of independent directors, providing training for management in corporate governance, enforcing controls to assess and mitigate risk when it comes to acquisitions, establishing a formal process for strategic transactions, managing and fully disclosing any conflicts of interest, and relying more on independent experts and advisors.
The board pledged to adopt all of these recommendations. Irwin Simon became Aphria’s independent board chair just after Christmas and he said the special committee’s findings give the board confidence in the company’s international growth strategy. Irwin added that corporate governance will be improved at Aphria and that it can now put this chapter behind it and “fully focus on a bright future” following a tumultuous couple of months.
The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.