HEXO grabs Hip-backed Newstrike in $260M deal

TORON TO • Quebec cannabis giant HEXO Corp. is acquiring Newstrike Brands Ltd. — the Oakville, Ont.-based mid-sized cannabis company backed by The Tragically Hip — in an all-stock deal worth $260 million, the companies announced Wednesday.

The deal is the biggest yet to take place between two sizable Canadian cannabis companies post-legalization in a crowded industry in which the top two players — Aurora Cannabis Inc. and Canopy Growth Corp. — control just under 50 per cent of domestic recreational cannabis sales.

Newstrike shareholders will receive 0.06332 of a HEXO common share in exchange for each Newstrike common share held, according to a joint press release.

HEXO currently has a market value of almost $1.6 billion — the acquisition of Newstrike will increase the company’s distribution footprint from three to eight provinces, and potentially propel it to become one of the top four biggest cannabis companies in Canada, after Canopy Growth, Aurora, Aphria Inc. and Tilray Inc.

“We’re adding $55 million in cash to HEXO with this acquisition, and this is in line with our vision to be in the Top 3 cannabis companies worldwide,” said Sébastien St. Louis, HEXO’S CEO.

“We started conversations last October, and it was a relatively quick process because our visions were aligned. We’re excited about Newstrike’s agreement with the Neal Brothers to create specialty products for the edibles market and so that joint venture will be integrated into this acquisition,” St. Louis said. Canada embarks on its second phase of legalization in a matter of months — cannabis edibles, beverages and concentrates are set to hit the recreational market this October.

St. Louis says the deal will boost HEXO’S capacity to approximately 150,000 kg of cannabis annually, on a total cultivation space of 1.8 million square feet.

HEXO’S revenues come largely from the Quebec recreational cannabis mar- ket. In its latest quarter ended Oct. 31, the company brought in a net revenue of $3.7 million, and shipped 952 kilograms of dried flower equivalents to the adult-use market, most of which went to fulfil its supply agreement with Quebec’s provincial distributor. The company sits on a 1-millionsquare-foot greenhouse in Gatineau, Que. which yields over 14 tonnes of cannabis annually, according to corporate disclosures.

Newstrike has two cannabis facilities in Ontario in Brantford and Niagara. Both are licensed to cultivate and sell cannabis for the recreational market under the UP Cannabis brand. Newstrike’s most recent quarterly report ending Sept. 30, 2018 showed the firm realized a revenue of just over $3.4 million to the adult-use market.

“We’ve always recognized that to become a dominant player in the Canadian cannabis sector we needed a strong partner,” said Newstrike CEO Jay Wilgar. “You look at our partnership with the Hip, with the Neal Brothers and then you look at HEXO’S partnership with Molson Coors … putting these two companies together makes an enormous amount of sense.”

HEXO is one of very few pot firms that have struck coveted deals with alcohol, tobacco and pharmaceutical companies — Cronos Group announced a $2.4-billion investment from tobacco giant Altria Group last December, while Tilray Inc. partnered up with Swiss drug giant Novartis AG around the same time for medical cannabis.

Wilgar and St. Louis are confident the merger will generate a combined revenue of $400 million by mid-2020.

“Everytime we have committed something to the market, we have delivered. We announced that by December 2018 we would have 1-million-square-foot up and running, and we met that promise and we got all our licences in under a year,” St. Louis said.

Wilgar declined to elaborate on what his specific role would be post-acquisition, but maintained that he would continue to be actively involved in Newstrike.

Newstrike jumped 11 per cent to close at 50 cents Wednesday in Toronto while HEXO rose 5.8 per cent to $7.83.

HEXO’S acquisition of Newstrike is the second big transaction between cannabis companies post-legalization — in December, Aleafia Health Inc. acquired medical cannabis producer Emblem Corp. for $173 million.