HEXO Corp Acquisition to Boost Brand Value, Reach

HEXO Corp. (TSX:HEXO), one of the Canadian marijuana stocks, said it has agreed to acquire Newstrike Brands Ltd. (TSXV:HIP)

SmallCapPower | March 14, 2019: HEXO Corp. (TSX:HEXO), one of the Canadian cannabis stocks, Wednesday announced that it has entered into a definitive agreement to acquire Newstrike Brands Ltd. (TSXV:HIP) for ~$263M in shares, or a value of approximately $0.46/share. Each Newstrike shareholder will receive 0.06332 of a HEXO share for each Newstrike share, implying a 4.1% takeover premium, based on HEXO’s and Newstrike’s March 12 closing price of $7.40 and $0.45, respectively. The transaction has been unanimously approved by the board of both HEXO and Newstrike. Upon completion of the transaction, existing HEXO and Newstrike shareholders would own approximately 86% and 14% of the pro forma company, respectively, on a fully-diluted basis.

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“With Newstrike, we’re adding talented employees and infrastructure to take HEXO to the next level on our journey to become one of the largest cannabis companies in the world. We’re extremely proud of our record of execution, and today are committing to achieving over $400 million in net revenue in 2020,” said HEXO Corp CEO and Co Founder Sebastien St-Louis in a statement.

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Following the acquisition HEXO will gain a supply deal in with the Ontario Cannabis Store (OCS) for 10,000 kg. This provides HEXO with a supply agreement in Ontario, in addition to HEXO’s supply agreement with the Société Québécoise du Cannabis (SQDC), which was the largest supply agreements out of the six Canadian LPs that secure agreements in Quebec. HEXO agreed to supply the SQDC with as much as 100,000 kg over three years (Year 1: 20,000 kg, Year 2: 35,000 kg, Year 3: 45,000 kg).

HEXO Corp will also acquire a substantial amount of cash. As of September 30, 2018, Newstrike had $107.6M in cash on its balance sheet. The merger will boost HEXO’s production capacity to 150,000 kg from 108,000 kg. This would be comparable to the 150,000 kg planned and funded capacity of Aurora Cannabis Inc. (TSX:ACB), Aleafia Health Inc. (TSX:ALEF), at 140,000 kg, and Organigram Holdings Inc. (TSXV:OGI) at 89,000 kg.

The transaction also provides HEXO access to four, cutting-edge production campuses and will increase the Company’s canopy space from 1.1M sq. ft to 1.8M sq. ft. Management guidance has indicated that the merged company is expecting to achieve net revenues (net of excise taxes) of $400M by F2020E and is expecting to realize $10M in potential synergies.

Additionally, the acquisition is expected to increase HEXO’s footprint from three to eight provinces (Ontario, Quebec, British Columbia, Alberta, Saskatchewan, Manitoba, Nova Scotia, and Prince Edward Island), which allows broader access to HEXO’s products. To date, HEXO’s revenues are derived largely from Quebec.

As of the close on Wednesday March 13, 2019, HEXO’s and Newstrike’s shares are up 5.8% and 11.1%, respectively. HEXO and Newstrike have market caps of $1.6B and $251M, respectively.

Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.

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