HEXO has global ambitions, CEO says

Quebec-based cannabis company HEXO Corp (HEXO Stock Quote, Chart TSX:HEXO) has announced that it will purchase Newstrike Brands, in an all-stock deal that HEXO CEO Sebastien St. Louis says will allow the combined company to produce over $400 million in net revenue by 2020.

Announced on Wednesday, the definitive agreement is an all-share transaction valued at approximately $263 million, with the deal both companies’ share price jump in trading.

The terms of the purchase involve virtually no premium to HIP shares, however, giving Newstrike shareholders 0.06332 of a HEXO share for every HIP share — that works out to roughly $0.504 per HIP share (Newstrike finished trading Thursday at $0.50).

Asked whether HEXO may need to sweeten the offer to get HIP shareholders — which include members of the Canadian rock band the Tragically Hip — on board, St. Louis said that he’s not interested in a bidding war.

“We’ve worked very closely with Newstrike management and the Hip on alignment and vision before releasing any details of this deal,” says St. Louis in conversation with BNN Bloomberg Thursday. “We have 25 per cent lock up and commitments from Newstrike’s largest shareholders which include the Hip, so we’re quite confident that this deal will go through as it would be very accretive to both sides.”

“HEXO has been facing unprecedented demand for its products and Newstrike is bringing a platform to add significant production capacity to the HEXO team and with the combination of entities we expect to do over $400 million in net revenue in 2020,” says St. Louis.

Newstrike’s stock is up 28 per cent in 2019, while HEXO is up 72 per cent, as both names have participated in the early year rally by marijuana stocks. But where HEXO is now well ahead of the highs set last in last January’s pot rush, HIP has trailed off and is considerably lower than the $3.30 high it reached fourteen months ago.

St. Louis says that along with adding production capacity, the all-stock Newstrike deal will mean more money is available to fuel HEXO’s plans on an international scale.

“HEXO has global ambitions and they’ll require about $6 billion in capital to take a 20 per cent plus market share in the markets where we operate worldwide. So being able to add another $55 million in cash to the balance sheet as part of this transaction just made tonnes of sense. We’re very well capitalized for the next leg of our journey so we’ll let the stock run a bit before we do any other types of financing,” he says.

As for the place for the Hip’s brand within HEXO, St. Louis stated, “We certainly love what the Hip have done and we think that they’re fully supportive of the HEXO vision of bringing branded cannabis experiences across many different verticals, so we’ll work closely with them to be able to lever the great presence that they have in Canada with over 800,000 followers.”