Hexo eyes pot expansion as it snaps up Redecan
Cannabis producer Hexo Corp. is acquiring Redecan, Canada's largest privately owned licensed cannabis producer with a hefty portfolio of brands, in a $925-million cash-and-share deal.
The proposed transaction is intended to create a more competitive platform in Canada that is positioned for further expansion into the United States, said Sebastien St-louis, chief executive and co-founder of publicly traded Hexo.
It would combine Ottawa-based Hexo, a dominant player in Quebec, with a product-dominant player in some of the largest markets in other parts of the country including British Columbia, Alberta and Ontario, St-louis said in an interview.
If the deal is approved by Hexo shareholders and consummated as envisioned, it will put the company on the verge of its objective of becoming the top licensed producer by recreational market share, he said. Hexo also has a joint venture with brewing giant Molson Coors to create cannabis and Cbd-infused beverages.
St-louis described privately held Redecan, which has established itself in niche cannabis products such as pre-rolls, oils, and capsules, as “the best kept secret in Canada.”
Joining forces in what amounts to a merger of equals as much as a takeover has been in the back of his mind for at least a year, he said, adding that he tried to get in touch with the firm earlier to discuss possibilities for the two complementary cannabis players with little overlap but was unsuccessful. More recently, however, the privately held company reached out to him.
“They said: `We're thinking of doing something. You're our first choice,'” he recalled, adding that their acceptance of a share component in the purchase price suggests they believe there's upside in the combination.
One of the dealmakers on the team was Adam Arviv, a co-founder of cannabis cultivator and retailer Green Growth Brands Inc. and BRN Group, which provided brand management services to the industry. “I have a very close relationship with the Montour family” that founded Redecan, Arviv said. “They came to me and asked me to give them my opinion and advice on what would be the best route for them to go.”
He made the connection with Hexo after determining that combining forces with the mid-sized Canadian player was the best way for Redecan to tap the capital markets and reach into the U.S. market.
Redecan did not follow many other cannabis producers and distributors to the public markets when there was a large appetite for the sector following recreational legalization in Canada in October of 2018. Will Montour, one of the company's co-founders, said the decision to team up with Hexo was driven by a desire to scale up.
“We've now entered a phase where scale is key, and our complementary consumer bases, brand portfolios and distribution relationships can enhance financial performance,” he said.
The combination will also provide Redecan with a springboard for expanded distribution. Pete Montour, another of Redecan's co-founders, said the combination will accelerate the company's growth both “within Canada and internationally.”
St-louis said the intention is to expand the brands across Canada and into the United States and Europe, including through joint ventures with large consumer goods companies like the one with Molson for products ranging from cosmetics to pet food. There are also plans to build up manufacturing capacity to expand the distribution of Redecan's recreational products such as pre-rolls if cannabis is legalized federally in the U.S.
“We're focused on manufacturing. We have no interest in being a retail company,” he said.
The transaction requires majority approval of Hexo's shareholders as well as regulatory approvals, and the aim is to close the deal by September, St.-louis said.
The purchase price is to consist of around $400 million in cash and $525 million in Hexo common shares, and Redecan shareholders are expected to collectively hold about one-third of Hexo's issued and outstanding common shares when the deal closes.
Late Thursday, Hexo announced the closing of an offering of US$360,000,000 in secured convertible notes due May 1, 2023 to fund the majority of the cash portion of the deal. Upon closing, Pete and William Montour are to join Hexo's board as directors.
For Hexo, the proposed transaction is part of an active acquisition strategy, and follows the February announcement that the company would purchase competitor Zenabis Global Inc. in an allstock transaction valued at $235 million. Earlier this month, Hexo announced it would purchase all the issued and outstanding shares of another cannabis producer, 48North, in a transaction valued at about $50 million.
Complementary consumer bases, brand portfolios and distribution relationships can enhance ... performance.