Hexo, Tilray finalize cannabis deal for debt purchase, ‘strategic alliance’

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Major Canadian cannabis producers Hexo and Tilray Brands signed a definitive agreement for a “strategic alliance,” with Tilray acquiring Hexo debt in exchange for the right to purchase Hexo shares.

The Tuesday morning announcement makes definitive a deal proposed in early March that also involves significant cooperation between the two companies.

New York-headquartered Tilray will purchase $193 million (243.3 million Canadian dollars) of Hexo senior secured convertible notes, with the right to convert them to Hexo shares at CA$0.85 per share.

That would give Tilray a roughly 35% stake in Hexo, according to a Tilray news release.

Ottawa, Ontario-based Hexo said the deal will give the company “a recapitalized balance sheet and the enhanced financial flexibility critical to accelerating its transformation into a cash flow positive business within the next four quarters.”

The notes’ maturity date will be extended by three years until 2026, in addition to other changes.

The deal will also involve:

  • An $18 million annual fee paid by Hexo to Tilray “for advisory services with respect of cultivation, operations, and production matters.”
  • Tilray taking on “some production and processing as a third-party manufacturer of products for Hexo.”
  • Hexo using Tilray as its exclusive supplier of cannabis products for markets outside Canada and the United States.
  • Cost-sharing between the two companies related to “facilities optimization activities, procurement, general and administrative costs,” plus “certain production and processing activities for straight-edge pre-rolls, edibles and beverages.”

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Cost synergies were said to be up to $80 million within two years.

Troubled Hexo, which is pursuing a transformation strategy, posted a CA$690.3 million loss for its latest quarter, including significant write-downs.

The Tilray-Hexo deal is expected to close by the end of May.

Hexo trades on the Nasdaq and Toronto Stock Exchange as HEXO.

Tilray trades as TLRY on the Nasdaq and TSX.