Update: Gatineau’s Hexo looks to become ‘top-tier’ pot firm with $263M Newstrike acquisition

Hexo
A look inside Hexo's Gatineau production facilities. File photo.

Gatineau’s Hexo (TSX:HEXO) is looking to become one of the largest cannabis companies in Canada – and by extension, the world – with its multimillion-dollar acquisition of an Ontario-based pot producer.

Hexo announced Wednesday it has proposed a $263-million all-stock deal to acquire Toronto-based Newstrike Brands, parent company of pot producer Up Cannabis.

The deal would add roughly 470,000 square feet of growing space in Ontario to Hexo’s existing footprint that already includes its 1.3 million-square-foot greenhouse facilities in Gatineau, enabling the combined company to produce some 150,000 kilograms of cannabis annually.

If successful, the acquisition would raise Hexo’s net revenue guidance to more than $400 million in fiscal 2020. The two firms’ combined distribution agreements would cover eight provinces.

Terry Lake, Hexo’s vice-president of corporate social responsibility and a former Canadian politician, tells OBJ that the acquisition furthers the company's ambitions to become one of the largest pot producers in Canada. Lake says the combined companies’ higher revenue threshold, in addition to the wider national reach, would turn Hexo into a “top-tier cannabis company” overnight.

“That, I think, is a significant signal to the market that this is a serious company that can compete at the top level,” he says.

Hexo had been in “serious discussions” with Newstrike for many weeks, Lake says, before the deal was formally announced Wednesday. The company expects $10 million in annual savings on the production and administrative side as a result of the merger, which remains subject to approvals from courts and regulators as well as Newstrike shareholders. The two companies’ boards have unanimously approved the deal.

“This is the most compelling combination we see in the Canadian cannabis sector,” said Newstrike CEO Jay Wilgar in a statement. “Our strength in Ontario and English Canada clearly complements Hexo’s strong position in Quebec and creates an industry leader.”

While the acquisition would give Hexo a stronger foothold in Canada, Lake says that the firm is also looking at cannabis market openings in Latin America, the United States and Europe. Last fall the company announced plans to set up a production site in Greece.

The Hexo-Newstrike deal is the latest sign of consolidation in Canada's cannabis sector, and not the only time firms have signaled an interest in the Ontario-based grower.

In December, cannabis company Aleafia announced a deal to acquire licensed producer Emblem Corp. Last year, Aurora Cannabis Inc. acquired rivals MedReleaf Corp. and CanniMed. In November 2017, CanniMed had announced an all-stock deal to acquire Newstrike. However, Aurora later launched a hostile-takeover bid of CanniMed and after a months-long battle, the two companies signed a friendly deal, abandoning the plans to acquire Newstrike.

Newstrike’s HIP ticker symbol on the TSX Venture exchange references the company's branding partnership with Canadian rockers the Tragically Hip. Lake notes his company has its own association with the rap group Wu Tang Clan, but says bringing Newstrike and the “iconic Canadian band” into the Gatineau firm’s fold will help Hexo become an “iconic Canadian cannabis company.”

Though headquartered just a few kilometres away from rival cannabis producer Canopy Growth in Smiths Falls, Hexo is looking to be the preeminent pot producer in the Ottawa area, Lake says. As the company grows both organically and through acquisitions, he says the firm remains proud of its local roots.

“I think that's something that is significant for the capital region and something we're very proud of.”

Hexo’s share price shot up more than seven per cent in trading on the Toronto Stock Exchange Wednesday. Shares of the firm were trading around $7.86 in the afternoon, up 46 cents on the day.

– With files from Canadian Press