Last week, HEXO Corp. (HEXO: TSX) (HEXO: NYSE) surprised the market when it announced the acquisition of Zenabis Global (ZEN: TSX) (ZBISF: OTCPK). The all-stock transaction values Zenabis at approx. $235 million (CAD) and the response from leading broker-dealers have been positive so far.
Through a strategic relationship with Molson Coors (TAP), HEXO has become a high-profile Canadian Licensed Producer (LP). Although the Canadian cannabis company does not have a favorable track record as it relates to making acquisitions, it has received three price target increases since announcing the transaction and we find this to be worth highlighting.
After the acquisition was announced, CIBC was the first broker-dealer to raise its price target on HEXO to $13.50 from $5.60 (CAD). This is a substantial price target hike and the rationale behind CIBC’s thesis is that Zenabis should generate at least an additional $60 million in revenue for the combined company.
The second financial firm to raise its price target on HEXO was Canaccord Genuity. The broker dealer raised its price target to $8 from $5 (CAD) which implies much less upside than CIBC’s price target.
Alliance Global Partners was the third broker-dealer to get more bullish on HEXO after the acquisition was announced. The broker dealer raised its price target to $14 from $9.50 (CAD) which is higher than both CIBC and Canaccord Genuity.
One of the main reasons for the price target increases is related to the synergies and multiples that are associated with the transaction. The broker-dealers believe that HEXO’s multiple is well below its peers and expects operation to benefit from the international exposure that Zenabis provides the entire company.
Over the next year, we will learn more about the impact that Zenabis has on HEXO’s business and will be closely following the story. We believe the cannabis sector has entered an M&A super cycle and this is a trend that we are bullish on.
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