In a move that’s expected to catapult it into top spot among Canadian recreational cannabis producers, Ottawa’s Hexo Corp. has agreed to acquire Toronto-based Redecan for $925 million.
Hexo said Friday that it will pay $400 million in cash and $525 million in Hexo shares valued at $7.53 per share.
The deal for the southern Ontario company, the country’s largest privately held pot producer, will increase Hexo’s share in the competitive cannabis market and lay the groundwork for global expansion, CEO Sebastien St-Louis told analysts.
“A few years ago, Hexo set a course to become one of the top three cannabis players in the Canadian adult-use market,” St-Louis said. “We’ve achieved and exceeded this objective. Today, we’ve positioned Hexo as No. 1. It’s a monumental achievement.”
Prior to Friday’s announcement, Hexo said it held the No. 3 spot in the recreational market. The company now says Redecan will make Hexo the volume leader in dried flower across premium, mainstream and value price points and give it the No. 1 position in Alberta, B.C., Quebec and Ontario.
The Redecan deal will give Hexo a 17 per cent market share, followed by Tilray with 15.5 per cent, Smiths Falls-based Canopy Growth at 14 per cent and Aurora Cannabis at 6.5 per cent, Desjardins Securities analyst John Chu said in a note to investors.
It will also introduce Redecan's oils, capsules, pre-rolls and vapes to Hexo's growing portfolio of vapes, flowers, edibles and expanding line of cannabis beverages it produces with Molson Coors Canada under the Truss Beverage Co. banner.
Redecan co-founder Pete Montour said his company’s management team felt “the time had come to become part of something larger.”
He said Redecan executives talked to several potential suitors about joining forces before agreeing to sell to Hexo.
“We realized very quickly that this deal was far and away the best fit,” Montour said.
St-Louis said Redecan’s expertise in increasingly popular product lines such as pre-rolled joints will give Hexo a valuable leg up as economies of scale lower their costs.
"We’ve been trying to figure out pre-roll for years now, and I can say although we’re quite advanced … we’re nowhere near Redecan."
“We expect that pre-roll will become a huge part of the total (market) demand,” he said. “We’ve been trying to figure out pre-roll for years now, and I can say although we’re quite advanced … we’re nowhere near Redecan. We are going to take that pre-roll technology that Redecan has perfected and we’re going to scale it.”
The deal is Hexo’s latest salvo in its intensifying efforts to introduce more consumer packaged goods categories to its portfolio and increase its hold on the market.
The company announced earlier this month that it would also purchase 48North Cannabis Corp. for $50 million, handing the company a cosmetics foothold with body oils and creams, bath salts and even intimacy oils.
In February, it said it would spend $235 million to buy Zenabis Global and its Namaste, Re-Up, Blazery and Founders Reserve brands.
The deals are meant to fortify Hexo's portfolio so it's ready to compete in the event that the U.S. federally legalizes cannabis.
The U.S. has been edging towards national legalization for months and is exploring a series of regulatory changes that would make it easier for cannabis companies to bank and operate in the country.
In anticipation of such moves, Canadian producers have embarked on a flurry of M&A deals. Tilray and Aphria merged, Smiths Falls-based Canopy Growth snatched up Supreme Cannabis and Ace Valley Cannabis and Sundial Growers said it will buy Inner Spirit Holdings.
Colorado production facility
To strengthen its foothold south of the border, Hexo recently agreed to acquire a 50,000-square-foot cannabis production facility in northern Colorado.
The company will use the facility to give U.S. consumer packaged goods brands access to Hexo's technology, which it's been using to drive down the costs of cannabis in Canada and create more products priced at the same levels of pot sold through the illicit market.
St-Louis said bringing Redecan into the fold puts Hexo in an even better position to be a market leader in the U.S. when the time comes.
“We’re confident that between Redecan’s know-how and Hexo’s IP lead … we believe we really have something wonderful to go to the U.S.,” he said.
“The idea is to build this winning portfolio, and when regulations allow, we can take that portfolio into mass channels.”
Hexo is also eyeing a major move into Europe to tap into that continent’s medicinal cannabis market.
St-Louis noted the firm is now licensed to sell cannabis products to the entire European Union out of a facility in Malta.
“We look forward to building this platform into a top-three global cannabis products company,” he said.
Hexo's Redecan deal is expected to close in the third quarter of 2021 and is subject to regulatory approvals.
The deal has a 24-month lockup period for Redecan shareholders, who will hold about 31 per cent of Hexo's outstanding common shares and get to nominate two people to serve on Hexo's board.
There is also a break fee if the deal doesn't move forward and Chu said "there is the possibility of a rival bid as Redecan has had discussions with other parties."
When asked whether Hexo could be outbid, chief financial officer Trent MacDonald stressed that the deal is "strong."
"They've had their choice of dance partners," he said. "I think any other licensed producer would have gained a lot of value by doing a deal with Redecan."
Hexo shares surged nearly 15 per cent to more than $9 in early-morning trading on the Toronto Stock Exchange before settling to $8.51 later Friday, up nearly eight per cent on the day.
– With additional reporting from the Canadian Press