New York-based Tilray Brands said Thursday it plans to acquire up to $211 million (267.5 million Canadian dollars) in outstanding senior secured notes issued by Hexo Corp., effectively throwing its troubled rival a lifeline and striking an alliance with the Quebec cannabis producer.
Under the terms of the proposed deal, the notes would be amended to permit Tilray to exercise conversion rights at a price of 90 Canadian cents ($0.71) per Hexo share and acquire a significant stake, approximately 40%, of the troubled company.
In October 2021, auditor PricewaterhouseCoopers had warned of “substantial doubt” about Hexo’s ability to continue as a going concern over debt repayments issue.
The debt purchase, when approved, would potentially address those issues.
Tilray CEO Irwin Simon said the proposed deal would be good for both companies, as it would effectively initiate a strategic alliance between two of the top marijuana producers in Canada “with complementary brand portfolios.”
Simon said the companies expect to realize commercial and production efficiency savings of up to CA$50 million within two years, to be shared evenly.
The notes are currently held by funds affiliated with HT Investments MA (HTI).
The maturity date of the notes would be extended by three years, to May 1, 2026.
Hexo would not receive any proceeds as a result of Tilray’s proposed purchase of the notes from HTI.
The notes would bear an interest rate of 10% per year from the date of closing, and interest would be paid to Tilray in cash in the first year.
An initial conversion price of CA$0.90 implies that Tilray has a right to convert into approximately 37% of Hexo’s shares, as of March 2.
According to the companies, the strategic alliance would provide financial and strategic benefits, including:
- Cost synergies worth tens of millions of dollars within two years, as well as shared services and procurement costs.
- “Increased product breadth and commitment to innovation.”
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Tilray said it will nominate Denise Faltischek to Hexo’s board upon closing.
Faltischek is Tilray’s head of international business as well as the company’s chief strategy officer.
As part of the proposed alliance, Hexo and Tilray said they plan to work together to evaluate cost savings and enter into agreements related to commercial transactions.
Examples of mutually beneficial commercial transactions are expected to include:
- Cultivation and processing services.
- Certain Cannabis 2.0 products, including pre-rolls, each with a view to achieving optimal profitability.
- Establishing a joint venture company to provide shared services to both businesses.
The proposed deal is subject to a number of conditions, including approvals from the Nasdaq and Toronto Stock Exchange.
Some analysts called the Tilray move a “clear positive for Hexo shareholders.”
“While the arrangement does bring benefits for Tilray shareholders, a move for long-term control is needed for this to really make sense in our view,” Owen Bennett, an analyst for New York-based investment bank Jefferies Group, wrote in a note to investors.
“The immediate winner here is Hexo where the current debt, due 2023, and its terms, create a significant operational headwind, and limit the company’s ability to invest appropriately.
“To further support potential for investment, Hexo also disclosed today that it has secured an additional CA$180M three-year equity backstop commitment from KAOS Capital and partners.”
Bennett said the move provides longer-term operational benefits to both companies.
However, for Tilray shareholders, the analyst wrote, “while also bringing benefits, you can make the case that this deal is making a competitor stronger whose share could have been up for grabs anyway given the debt limiting possible investment.”
Hexo shares trade as HEXO on the Nasdaq and Toronto Stock Exchange.
Tilray shares trade as TLRY on the Nasdaq and TSX.
Matt Lamers can be reached at email@example.com.