Ottawa-based Hexo Corp. will acquire competitor Zenabis Global Inc. in a $235-million deal that will give the cannabis company a European foothold and strengthen its domestic business.
The deal, which will see Hexo acquire two indoor growing facilities and get access to a greenhouse, comes as the Canadian pot market is starting to consolidate amid talk of potential U.S. cannabis legalization.
Hexo CEO Sebastien St-Louis told OBJ Tuesday the company has been eyeing acquisition partners for more than a year as it looks to “really grow up from that startup phase and become a company that makes money.”
St-Louis said the deal puts Hexo on solid footing as Canadian industry heavyweights jostle for position in a turbulent marketplace. Fellow Canadian cannabis producers Tilray and Aphria are set to merge later this year, after rumours suggested Aurora Cannabis was circling Aphria.
Hexo ranked fourth in overall Canadian adult-use cannabis sales in the last quarter, but the acquisition of Zenabis moves it up the ladder, St-Louis explained.
"Now we’re clearly top three and we’re nibbling at top two."
“Now we’re clearly top three and we’re nibbling at top two,” he said. “If you’re a top-two company in this industry going into this final phase of consolidation, your brands will stay.”
Under the agreement Tuesday, shareholders of Vancouver-based Zenabis will receive 0.01772 of a Hexo common share in exchange for each Zenabis common share held.
The companies said the ratio is a 19 per cent premium based on the 20-day volume-weighted average price of Zenabis's and Hexo's common shares.
Hexo believes its deal will help the company go head-to-head with these rivals, access the European medical cannabis market through Zenabis's partnerships and result in estimated annual savings of about $20 million within one year of the agreement being complete.
“Like Hexo, Zenabis believes that the combination should deliver meaningful synergies, a stronger financial position with increased flexibility, and should position the combined company to meet growing consumer demand on a national and international basis,” Shai Altman, Zenabis's chief executive, said in a statement.
Pot companies have been eyeing international markets in recent months as they realize demand for recreational cannabis is lower than anticipated and that the illicit market has continued to flourish even after legalization.
These companies have been seeking European Union Good Manufacturing Practices certification – a standard required for companies wanting to export cannabis to Europe.
Zenabis already operates a lab in Europe, and St-Louis said the company’s partnerships with European medical cannabis producers offer “multimillion-dollar export opportunities” that will lay the groundwork for even bigger sales once pot is legalized for recreational use on the continent.
Canadian producers have also turned their attention to the U.S., where President Joe Biden has spoken in favour of legalization and the Democratic party is pushing a bill that will allow financial institutions to work with cannabis companies without retribution.
St-Louis said the combined company is on the path to becoming cash-flow positive, which will free up more capital for Hexo to “invest in the larger market south of the border” through efforts such as Truss CBD USA, its joint venture with Molson Coors to produce cannabis-infused beverages in states where they are legal.
Biden's presidency has caused pot stocks to climb, and the deal announced Tuesday only added to the spike.
Hexo’s stock was up more than 20 per cent to $11.52 in final trading on the Toronto Stock Exchange Tuesday, while Zenabis's shares rose 16 per cent to 18 cents on the TSX.
Their deal was already unanimously approved by each company's board of directors, but will require the support of at least 66 per cent of Zenabis shareholders to move forward.
If Hexo backs out of the deal it will have to pay Zenabis a $6-million termination fee.
Meanwhile, St-Louis said Hexo is in “ongoing discussions” with other Fortune 500 companies about potential partnerships in areas such as edibles.
“We’re never going to make the best chocolate in the world, but there’s no reason we can’t partner with the best chocolate company in the world, put our best cannabis technology in it, and then … make the best product possible for consumers,” he said.
– With additional reporting from OBJ staff