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Canadian cannabis company Hexo unveils its third and biggest deal of the year so far

Ciara Linnane

Hexo is buying family owned Redecan for $764.7 million in stock and cash as dizzying pace of M&A deals in the cannabis sector continues

Canadian cannabis company Hexo Corp. announced its third and biggest deal of the year so far on Friday with news that it is acquiring privately held Redecan for C$925 million ($764.7 million) in cash and stock.

Gatineau, Quebec-based Hexo (HEXO.T) said the deal will propel it to leader in the Canadian adult-use cannabis market and give it number one position in Canada's four biggest markets, Alberta, British Columbia, Quebec and Ontario.

"The Canadian adult-use industry continues to evolve at a rapid pace, and we are at the forefront of that change," Hexo Chief Executive and co-Founder Sebastien St-Louis said in a statement.

Under the terms of the deal, Hexo will pay C$400 million in cash and issue C$525 million of common stock at an implied price of C$7.53, equal to the five trading day-period volume-weighted average price of HEXO common shares on the Toronto Stock Exchange. Hexo will fund the cash portion of the deal using the proceeds from an offering of $360 million of convertible bond due May 1 that were sold directly to an institutional investor on Thursday.

See now:Cannabis company executives saw double-digit salary gains in first quarter amid shortage of experienced workers (link)

The deal is expected to close in the third quarter. Redecan is a family-owned business with 30 years of history in the agricultural sector.

"We've now entered a phase where scale is key, and our complementary consumer bases, brand portfolios and distribution relationships can enhance financial performance," Redecan co-Founder Will Montour said in a statement.

See now: New York's 13% cannabis tax may be too high, since state has 'one of the most sophisticated' black markets in U.S., expert says (link)

Redecan will leverage its proprietary pre-roll technology to help Hexo expand across Canada and capture opportunities in the U.S. and Europe.

"Redecan is Canada's largest privately held cannabis company by revenue, consistently capturing top-5 Canadian adult-use market share with its large portfolio of deep value-priced adult-use products," said Raymond James analyst Rahul Saraugaser.

The deal is the third by Hexo this year. In February, it announced the purchase of Zenabis Global Inc. for C$235 million in stock, and earlier in May, it announced the acquisition of 48North Cannabis Corp. for C$50 million in stock.

The cannabis sector has seen more than its fair share of deals of late in both the Canadian and U.S. markets. Earlier in May, U.S. multi-state operator Trulieve Cannabis Corp. said it was acquiring Harvest Health & Recreation Inc. (link) in an all-stock deal valued at about $2.1 billion, giving it an entry to the Arizona market.

Don't miss:Canopy Growth stock upgraded to buy: 'The horse is finally ahead of the cart,' says MKM analyst (link)

That deal came a week after Canadian licensed producers Tilray Inc. (TLRY) and Aphria Inc. announced the closing of their merger, (link)creating the world's biggest cannabis company measured by revenue.

See now: Cannabis stocks rally after Chuck Schumer leads drive for reforms that may end federal prohibition (link)

In April, Canopy Growth Corp. (WEED.T), an early leader in the Canadian sector thanks to a $4 billion investment from beverages giant Constellation Brands Inc. (STZ) (link), said it was acquiring Toronto-based Supreme Cannabis Co. Inc. (link), in a stock-and-cash deal valued at about C$435 million ($346 million).

Also in April, Organigram Inc., another Canadian player, acquired The Edibles & Infusions Corp. for C$22 million in stock, (link) plus up to an additional C$13 million in shares, in its first deal since receiving a C$221 million ($176 million) investment from British American Tobacco PLC (link).(BATS.LN)

"We anticipated a wave of consolidation building among large and small cannabis players alike,' said Raymond James' Saraugaser. The trend will likely continue as the Canadian market grows, he said, and as stores reopen after COVID-19 restrictions.

"In light of their outsize market share relative to valuation, we believe Village Farms Organigram (OGI.T), Auxly Cannabis , and other small operators with top-10 market share could soon be acquisition targets," said the analyst.

He noted that none of those companies has commented on any possible scenarios.

Hexo shares rose 8% on Friday and have gained 92% in the year to date. The Cannabis ETF (THCX) has gained 41% and the AdvisorShares Pure US Cannabis ETF (MSOS), which tracks U.S. multi-state operators, has gained 14%. The S&P 500 has gained 12%.

Read now:Curaleaf's strong quarter sets it up for a better-than-expected year -- and that's without sales in New York and New Jersey (link)

-Ciara Linnane; 415-439-6400; AskNewswires@dowjones.com

 

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05-28-21 1457ET

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