HEXO Should Now Have The Platform It Needs To Capture The Canadian Cannabis Consumer

HEXO Corporation (TSX: HEXO) (NYSE: HEXO) ended last week on a high note after announcing a definitive agreement to acquire Redecan, Canada’s largest privately-owned Licensed Producer (LP) for $925 million (payable in cash and through the issuance of common shares).

The definitive purchase agreement comes a few weeks after HEXO announced a transaction to acquire 48North, and only a few months after announcing a definitive acquisition agreement to acquire Zenabis Global Inc. (TSX: ZENA). Both 48North and Zenabis are Canadian LPs and we will monitor how the management team is able to integrate the businesses.  

HEXO CEO and co-founder Sebastien St-Louis said that M&A will be part of the growth strategy until the business is a top 3 global cannabis product company. We are favorable on the visibility that is associated with the recent acquisitions and will monitor how the management team is able to accomplish this goal.

Following the acquisition of Redecan, HEXO expects to be the top player in Canada’ recreational cannabis market and we will monitor how the business advances after the closing of these acquisitions. 5 key takeaways from the acquisition include:

1. According to data from Headset’s recreational market share data (from October 1, 2020, to March 31st for Ontario, British Columbia, and Alberta and based on fourth quarter sales data provided by the Quebec), the combined company would have the most market-share in Canada’s recreational cannabis market and will be a leading player in four of Canada’s largest markets
2. The acquisition provides HEXO with a robust Canadian brand portfolio 
3. The combined company is expected to be a leader across key consumer product categories and will have established distribution channels throughout the country.
4. Redecan’s lean production capabilities are expected to improve the performance of HEXO from a financial and a cash flow standpoint
5. By leveraging the international exposure that HEXO has, the combined company should prove to be a platform for global growth

The day before the acquisition was announced, HEXO announced a $300 million offering of senior secured convertible notes.  The company said the proceeds would be used to fund the potential acquisition of a large Canadian LP. With a transaction value that is near $1 billion, we believe Redecan was the potential acquisition it referred to in the senior note offering. 

HEXO has been highly focused on making strategic bolt-on acquisitions and this is a trend that we are closely following. Going forward, the Canadian LP expects to recognize tens of millions of synergies from the transactions and we will monitor how the management team is able to advance the business. 

If you are interested in learning more about HEXO’s recent acquisition, please send an email to support@technical420.com with the subject “HEXO’s Acquisition Strategy” to be added to our distribution list. 

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Michael Berger is Managing Partner of StoneBridge Partners LLC. SBP continues to drive market awareness for leading firms in the cannabis industry throughout the U.S. and abroad.

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