As
reported last Friday in The Market Herald Canada, Ottawa-based
HEXO Corp. (
TSX.HEXO) went ‘all-in’ on one of the cannabis sector’s biggest purchases in recent history –
a $925 million acquisition of cannabis producer Redecan, as the cannabis LP continues its ongoing quest for major market share.
The deal for privately-held Toronto-based Redecan is expected to dramatically increase HEXO's share in the highly-competitive North American cannabis market and build on its long-standing corporate strategy to rise to top three status in the Canadian adult-use cannabis market.
Highlights of Acquisition:
Under the terms of the Share Purchase Agreement, the $925 million purchase price will be paid to Redecan shareholders as follows:
- $400 million in cash due upon closing
- $525 million through the issuance of HEXO common shares at $7.53 per share
- Redecan shareholders will collectively hold approximately 31% of HEXO’s issued and outstanding common shares.
HEXO expects to convene a meeting in August 2021 to seek final shareholder approval.
But is the deal bullet-proof M&A spree or a high-stakes gamble that that is fraught with danger? At this point the cards are still on the table, but there are indications that the HEXO’s doubling down on the Redecan play is
not an improbable bet on an inside straight.
The HEXO / Redecan deal will increase HEXO’s market share to about 17%, followed by Tilray Inc. at around 15.5%, 14% for Canopy Growth Corp., and 6.5% for Aurora Cannabis Inc. That puts HEXO in first place, at least for the time being.
The definitive share purchase agreement will also introduce Redecan's cannabis oils, capsules, pre-rolls, and vapes to HEXO's expanding portfolio of flower, edibles vapes, and growing lineup of cannabis beverages it produces with Molson Coors Canada under the Truss Beverage Co. banner name. And, that’s a lot of product and a lot of inventory under one umbrella.
HEXO CEO and co-founder Sebastien St-Louis commented on the nuts and bolts of the deal:
“We articulated a plan to become a top three cannabis player in the Canadian adult-use market. With today’s announcement, we believe that we are on the verge of surpassing that objective to become the no.1 licensed producer by recreational market share. Building on our strong market momentum, the combination of HEXO and Redecan reinforces our position as an industry leader and creates a robust foundation for growth, efficiency at scale and improved financial results.”
HEXO CEO, Sebastien St Louis. Source: Actualites UQAM
The CEO has maintained that mergers and acquisitions will be part of HEXO’s long-game strategy until the company is one of the top three global cannabis products makers.
The HEXO / Redecan deal has a two-year lockup period for Redecan shareholders, who will, in turn, hold about 30% of HEXO's outstanding common shares and then get to nominate two people to serve on HEXO’s board of directors. HEXO now carries a market cap in excess of CDN$1 billion.
What does this mean for investors? Will HEXO carry a heavy debt load and uneven EBITDA that makes investors wary? Or will it create such a sector behemoth in the cannabis LP and retail space that buries many of its competitors beneath its footprint and opens up huge, new revenue streams? Of course, only time will tell.
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