Aphria Shares Tumble a Second Day as Pot Firm Defends Deals

(Bloomberg) -- Aphria Inc. tumbled as much as 27 percent after the pot company's defense of its deal-making in Latin America failed to win over investors spooked by a short-seller report that called the company a “black hole.”

Shares were down 21 percent to $4.76 at 12:29 p.m. in New York, bringing Aphria's two-day decline to 40 percent and cutting its market value to $1.18 billion.

Aphria's takeover of LATAM Holdings Inc., which closed in September, “was a transaction negotiated at arm's length between two publicly traded companies, each of which retained professional financial advisers,” the company said in a statement Tuesday in response to the short sellers.

Gabriel Grego, founder of Quintessential Capital Management, released a report Monday in conjunction with Hindenburg Research that said Aphria overpaid to acquire companies held by insiders in South America and the Caribbean. The short seller said Aphria purchased companies from SOL Global Investments Corp., which had acquired them shortly before at a “significantly lower” price from three Canadian shell companies linked to Andy DeFrancesco, chairman of SOL and adviser to Aphria.

Aphria denied that it and SOL are “sister” companies, as alleged by Grego. Its board received financial advice and a fairness opinion on the LATAM acquisition from Cormark Securities Inc., and Aphria believes that the purchase price was comparable with similar Latin American deals by other large Canadian cannabis companies, it said.

Hindenburg rebuked Aphria's defense in a statement Tuesday, calling it “supremely underwhelming,” and saying it failed to respond to several allegations contained in its original report. Both Quintessential and Hindenburg are shorting Aphria.

Jamaica Office

In his report, Grego posted pictures of his visits to dilapidated offices in Jamaica associated with the recent acquisition and a suburban pharmacy in Buenos Aires, which he said was evidence that the company's assets are worthless. Aphria said its representatives conducted site visits and management meetings in each country before concluding the deal.

“Since closing this important strategic acquisition in September, we have made considerable progress building out our operations on the ground in Latin America and the Caribbean,” Aphria Chief Executive Officer Vic Neufeld said in the statement. He added that he and other members of the executive team bought more than C$3.1 million ($2.4 million) worth of Aphria shares Monday.

Analysts were divided Aphria's future. BMO analyst Tamy Chen cut her price target for Aphria to C$9 from C$22, citing “considerable uncertainty surrounding the stock” following the short-seller allegations. Aphria trades at C$6.20 in Toronto. The shares have plunged by two-thirds since the day before Canada legalized recreational pot on Oct. 17, twice the decline of the Horizons Marijuana Life Sciences Index.

Martin Landry, analyst at GMP Securities, put his rating and price target under review. “We believe that management's credibility may have been impacted by the allegations raised in this report,” Landry wrote. “It is unclear at this point how the company will re-establish trust with investors.”

Zero Target

Quintessential's Grego told delegates at a conference in New York Monday that his target price for Aphria is zero. Scott Willis, an analyst at Grizzle, a Toronto-based research firm that covers cannabis and crypto-currencies, disputed that, saying it's unlikely regulators will find enough material to come down on Aphria.

“What we can definitively say is Aphria is not a worthless stock,” he wrote in a note published Tuesday, pointing to its C$314 million in cash and plans to harvest 255,000 kilograms of cannabis by next year. “Even if we remove all international assets from the equation, Aphria is a C$20 stock based on the Canadian greenhouses alone.”

--With assistance from Luca Casiraghi.

To contact the reporter on this story: Kristine Owram in Toronto at kowram@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, David Scanlan, Jacqueline Thorpe

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