(This story has been updated with and comments from an analyst and Hexo’s CEO.)
Ottawa, Ontario-headquartered cannabis producer Hexo Corp. on Tuesday entered a definitive agreement to buy struggling competitor Zenabis Global for 235 million Canadian dollars ($185 million) in stock.
The proposed acquisition of Vancouver, British Columbia-based Zenabis would give Hexo a toehold in Europe’s medical marijuana market and make it a top-three producer in Canada’s recreational market, CEO and co-founder Sebastien St. Louis told Marijuana Business Daily in a phone interview.
Zenabis shareholders will receive 0.01772 of a Hexo share per Zenabis share under the terms of the arrangement, which represents a 19% premium over the 20-day average as of Feb. 12, the companies said in a news release announcing the planned acquisition.
In a note to clients, Jefferies analyst Owen Bennett said the deal puts Hexo on an improved near-term financial footing, but he questions the strategic rationale.
“We do wonder if this has been overly driven by short termism, and from a strategic perspective it does not really get us excited,” Bennett wrote.
Bennett said Hexo may have been better placed doing something in the United States, noting that the Zenabis foothold in Europe is only a joint venture.
Both Hexo and Zenabis have sold off large cultivation assets and reported significant losses in recent years.
Zenabis lost CA$40.5 million in the nine months ended Sept. 30, 2020, and an additional CA$127 million in the 2019 fiscal year.
“We are proceeding with this transaction because we believe it should be accretive for our shareholders, and it also positions Hexo for accelerated domestic and international growth while supporting near-term requirements for additional licensed capacity,” St. Louis said in a statement.
“Hexo’s growth strategy includes expanding our global presence, and this acquisition is an important step in that direction.”
The deal has been approved by the respective companies’ boards but still requires approval by Zenabis shareholders.
St. Louis told MJBizDaily the deal would make Hexo one of the top producers in Canada.
Combined, the two companies saw quarterly revenue of CA$53.2 million in their latest quarters.
That approaches sales of rival producer Aurora Cannabis, which reported revenue of CA$67 million in its previous quarter.
The deal also would give Hexo a foothold in the European medical marijuana market.
“The transaction gives Hexo immediate access to the European medical cannabis market through Zenabis’ local partner, with an established facility in the European Union supplying pharmaceutical products to the European market,” the company said.
According to an investor update by Zenabis last summer, the company has a deal to supply the growing Israeli and Australian markets.
Hexo’s move comes as some rival Canadian companies are scaling back in the European market.
Aurora Cannabis and Canopy Growth, for instance, both reeled in expansion plans in Europe in 2020.
Marijuana Business Daily‘s European report, published last year, estimated Germany’s annual retail sales in 2019 of at least 170 million euros ($200 million). That compares with Canadian expenditures that year of about CA$618 million.
Hexo also said the proposed deal would give it “access to a 2.1 million square feet greenhouse facility, totaling approximately 2.735 million square feet of near-term cultivation space offering diversified growing and production techniques.”
Zenabis brings with it two indoor production facilities and adds roughly 111,200 kilograms (245,154 pounds) of annual cultivation capacity to Hexo, according to the release.
St. Louis told MJBizDaily the Zenabis facilities would be used to produce premium products that require smaller growing rooms, whereas the Hexo greenhouse in Quebec is more geared toward large-scale production.
Less than one year ago, Hexo sold a large greenhouse in Niagara, Ontario, for approximately CA$10.25 million that it previously acquired as part of a CA$263 million deal to buy Newstrike Brands.
Canada is sitting on a worsening inventory overhang, which reached a staggering 1.06 million kilograms after the country’s first large-scale “croptober” – when most of the fall outdoor harvest comes in.
Late last year, Zenabis reached a conditional agreement to sell one of its facilities in British Columbia for half the original listing price.
Zenabis had CA$4.8 million in cash as of Sept. 30, 2020.
Hexo had CA$149.8 million in cash at the conclusion of its previous quarter ended Oct. 31, 2020.
Matt Lamers is Marijuana Business Daily’s international editor, based near Toronto. He can be reached at email@example.com.