Famous short seller Andrew Left says the marijuana producer that was recently hit by short sellers is primed to be taken over by Diageo
- Short seller Andrew Left's firm Citron Research on Tuesday afternoon released a bullish report on Canadian marijuana producer Aphria.
- Aphria was recently targeted by short sellers who called three recent Latin America acquisitions the NYSE-listed marijuana producer made "largely worthless." The shorts predicted Aphria's stock would sink to $0.
- Citron said Aphria could be a takeover target as big consumer companies look for ways to play the booming marijuana industry.
How the tables have turned: famous short seller Andrew Left is going long on a marijuana stock that was recently targeted by short sellers.
Left's firm, Citron Research, on Tuesday afternoon released a bullish report on the Canadian marijuana producer Aphria.
"Expect an $APHA major partnership or total buyout SOON," Citron tweeted on Tuesday, touting the report.
Citron's report says Aphria's stock, now trading around $5.93, will go north of $8 by year-end. Perhaps more impactful, Citron says Aphria could be an acquisition target for a major consumer packaged goods company - or even another marijuana producer.
Shares of Aprhia rose 8% on the Ciron report.
A spokesperson for Aphria couldn't be reached for comment.
Why Aphria could be a prime acquisition target
Large consumer companies companies are both a) interested in gaining exposure to the booming marijuana industry, and b) see publicly traded Canadian marijuana growers, as the safest way to play, according to Citron's note.
Canada legalized marijuana federally on October 17, while the US government considers marijuana an illegal, Schedule I drug. That means no large corporations will invest in or acquire any marijuana companies that sell THC-containing products in the US, fearing federal regulators.
Large consumer packaged goods companies are already dabbling in cannabis.
Constellation Brands - the third largest beer company in the US - in August paid $4 billion in August for a 38% stake of Canopy Growth. Earlier this month Altria - the tobacco maker behind Marlboro - announced its intent to sink $1.8 billion into Cronos Group, a move that most Wall Street analysts cheered as bringing further legitimacy to the nascent marijuana sector.
Aphria has an existing partnership with Southern Glazer, a spirit and wine distributor, that some bigger alcohol companies could see as a sort of litmus test.
"If one of the larger beverage companies wants to see how cannabis might play out on a global recreational level, this one particular partnership might be worth the value of the whole company," the Citron report said.
Could it be Diageo - or could it be Tilray?
As for who would make a play for Aphria, Citron has some interesting theories. One leading hypothesis: Diageo is on the prowl for a cannabis play. A former Diageo exec, Jakob Ripshtein, is now Aphria's president.
Diageo's chairman, Javian Ferran, has also stated he's keeping a close eye on the cannabis industry, per Bloomberg.
Another hypothesis: a larger competitor could scoop up Aphria, in what Citron said would be a "Machiavellian move."
For Tilray, it could "gain a real business to justify it's overvalued stock price" while removing a competitor from the market, Citron said.
Or, Aurora - a company that went on a dealmaking tear in 2018 - could buy Aphria outright. Aurora merged with rival firm Medreleaf in a $2.3 billion stock deal in May. Citron said that Aphria is generating similar revenue to Medreleaf prior to the takeover deal.
Buying Aphria could also give either Tilray or Aurora a better shot at an investment from a major CPG company, Citron said.
Going long where others are short
Citron's position comes on the heels of a recent short report from Quintessential Capital Management and Hindenburg Research, which alleged that the marijuana producer is "part of a scheme orchestrated by a network of insiders to divert funds away from shareholders into their own pockets."
The short seller's report centers on three Latin American acquisitions Aphria purchased from Scythian Biosciences - now Sol Global Investments - which the short sellers say are "largely worthless." Aphria shares dropped as much as 30% after QCM's Gabriel Grego presented his position at an investor conference earlier in December, though the stock has since recovered some of its losses.
Grego couldn't be reached for comment prior to publication.
In response to the short sellers' claims, Aphria contracted John M. Herhalt, an independent board member of Aphria and a former senior partner at KPMG, a Big Four audit firm.
"While we look forward to the results of the investigation, we find them irrelevant now to the greater story," Citron said.
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