Why Hexo is buying 48North Cannabis for CA$50 million: Q&A with CEO St. Louis

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Hexo acquires 48North Cannabis, Why Hexo is buying 48North Cannabis for CA$50 million: Q&A with CEO St. Louis

Hexo Corp. is buying competitor 48North Cannabis Corp. in an all-stock deal worth approximately 50 million Canadian dollars ($41 million), the companies said Monday morning, continuing the Ottawa, Ontario-headquartered company’s recent acquisition spree.

The planned acquisition comes on the heels of Hexo’s agreement in February to buy another struggling rival, Zenabis Global, for CA$235 million in stock. That deal is expected to close June 1.

And just last week, Hexo agreed to buy a 50,000-square-foot cannabis production facility in northern Colorado, marking a step forward for the Canadian producer’s U.S. ambitions. Terms of the deal weren’t disclosed.

As for “why 48North” and “why now,” Hexo CEO Sebastien St. Louis told MJBizDaily the deal is about competing in Canada’s “super premium” flower category and establishing intellectual property for cannabinoid-infused cosmetics for a U.S. expansion.

Hexo and 48North share something else in common: Quebec’s cannabis wholesaler, Société québécoise du cannabis (SQDC), is both companies’ largest customer.

In fiscal 2020, the SQDC accounted for 33% of 48North’s revenue. For Hexo, the SQDC accounted for 70% of gross cannabis sales for all of its fiscal 2020.

48North lost CA$51.3 million in its past six quarters.

The deal requires approval by 48North shareholders.

MJBizDaily spoke with Hexo CEO Sebastien St. Louis about why this deal came to fruition and the steps ahead.

What were the key components of this deal? 48North’s brands, intellectual property, physical assets?

Cosmetics IP. As I’m looking to cosmetics CPG in the U.S., it’s a good platform.

The second piece is their premium flower. I see this as an addition to the super premium flower segment for Hexo.

Market share and listing is the third (reason). They punch above their weight in core listings in Ontario.

Ontario (the wholesaler) has 100 core products, and every licensed producer is fighting over those SKUs. The great thing that 48 did is they got more of those listings than their market share (would suggest).

It’s about distribution as well.

48North has had some tough quarters recently, reporting losses. In 2020, the company lost CA$40 million. That didn’t concern you?

No, because by the time you integrate them, there are meaningful synergies there.

A lot of those synergies come out of our Bellville Centre of Excellence (Hexo’s 900,000-square-foot manufacturing center). By moving (some of) their manufacturing into Belleville, we get a ton of synergy.

The deal is expected to see up to CA$12 million of accretive synergies within 12 months following the close and to achieve positive EBITDA for the combined entity.

Quebec’s wholesaler has been 48North’s biggest customer. The province is also Hexo’s core market. How much of this deal is about defending your home turf?

No, we’re still very much No. 1 in Quebec.

It’s a nice add-on. We’re happy to see that they’ve got that home-turf advantage. It’s great to see, but it’s not a core reason to do it (buy 48North).

You’re not dipping into your healthy cash position for this deal. How important was that to keep your war chest ready for other M&A opportunities?

We can conserve cash by doing an all-stock deal, which it’s great. But we’re not afraid of deploying cash, mind you, if we need to.

All things being equal, obviously keeping the powder dry for the U.S. is a great thing.

Can you talk about integrating two acquisitions at the same time? The Zenabis deal is expected to close in a couple of weeks and the 48North deal this summer.

It’s certainly difficult. The M&A team is hard at work, but we supplemented it with some world-class consulting. We’re using Protiviti (a global consulting firm specializing in risk, compliance and business processes) to promote those integration plans.

So far, the Zenabis integration plan is going extremely well. They’re also back-to-back, in the sense that they’re not completely overlapping.

Right now, we’re in the thick of it with the Zenabis integration planning. We’re doing the prework with 48North, but the thick of it comes later.

The company’s shares trade as HEXO on the New York Stock Exchange and Toronto Stock Exchange.

This interview was edited for length and clarity.

Matt Lamers is Marijuana Business Daily’s international editor, based near Toronto. He can be reached at matt.lamers@mjbizdaily.com.