HEXO (HEXO.TO)(HEXO) has announced a $235 million all-stock deal to acquire rival Canadian cannabis producer Zenabis (ZENA.TO), creating what the companies are billing as a "top three licensed producer" by sales in the country's recreational market.
Ottawa-based HEXO said the deal will result in about $20 million in savings within a year of closing, and give the company the ability to produce 111,200 kilograms of additional cannabis supply through Vancouver-based Zenabis' greenhouses. HEXO would also gain a foothold in the European medical cannabis market through a Zenabis partnership.
"Zenabis has built solid relationships, and they share HEXO’s vision of bringing exceptional branded cannabis experiences to adults everywhere, in Canada and abroad,” HEXO CEO and co-founder Sebastien St-Louis said in a news release on Tuesday.
Under the terms, Zenabis shareholders will receive 0.01772 of a share of HEXO for each Zenabis share. The deal amounts to a 19 per cent premium paid to Zenabis shareholders based on the twenty-day volume-weighted average price of Zenabis stock. If completed, the combined company would be 87.43 per cent owned by HEXO shareholders and 12.57 per cent owned by Zenabis shareholders.
The transaction has the support of both company's boards, but requires regulatory approval and support from over 66 per cent Zenabis shareholders. One member of Zenabis’ executive team is to be appointed to HEXO’s board of post-closing. The terms also include a $6 million termination fee in the event Zenabis accepts a superior bid.
“This is a compelling combination," Zenabis CEO Shai Altman added in Tuesday's release. "Our brands and strains strength across Canada, coupled with our international footprint and state of the art low cost and high quality cultivation facilities complements HEXO’s business, creating an industry leader."
The deal also hinges on Zenabis selling its Bevo Agro subsidiary, a company that produces vegetables in Langley, B.C. Tuesday's announcement also notes that Zenabis is walking away from arbitration proceedings related to supply agreement payment dispute with High Park, a subsidiary of Tilray (TLRY).
Zenabis has faced a number of challenges in recent months, laying off roughly a quarter of its workforce in March and selling a Delta, B.C. production facility for well below its original asking price. In September, the company appointed its fourth chief executive officer in two years.
In January, Zenabis said it was engaged in exclusive merger talks with “another significant licensed cannabis producer.” That followed Calgary-based Sundial Growers (SNDL) purchase of the senior secured debt of subsidiary Zenabis Investments in late December, a move Zenabis described “an attempt to coerce Zenabis into being acquired by Sundial.”
HEXO's recent track record has been mixed. The company was the first to introduce a value-priced dried flower product aimed at competing head-on with the illegal market in 2019. However, analysts have questioned the long-term viability of the now-popular discount strategy. On a brighter note, the company has found success with its infused beverage joint venture with Molson Coors Canada (TAP-B.TO). It's Truss beverage brand said it took the leading market share position from Canopy Growth (WEED.TO)(CGC) in November.
"HEXO management has been executing quite well lately, in our view, and we continue to monitor the company's progress in driving toward profitability," Oppenheimer analyst Rupesh Parikh wrote in a note to clients on Tuesday. "Following the Tilray-Aphria (APHA.TO)(APHA) announcement, and now this business combination, we believe these are the right steps to help consolidate the space, and over time improve profitability for the winners."
Toronto-listed Zenabis shares climbed 12.9 per cent to $0.17 at 2:14 p.m. ET on Tuesday. HEXO shares jumped 14.85 per cent to $10.82.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.