Hexo Corp. has announced a deal to buy cannabis producer Redecan for $925 million as the pot company continues its hunt for market share.
Ottawa-based Hexo said Friday that it has agreed to pay $400 million in cash and $525 million in Hexo shares at $7.53 per share.
The deal for Toronto-based Redecan, which is privately held, will increase Hexo's share in the competitive cannabis market and build on its long-standing plan to become a top three cannabis player in the Canadian adult-use market
“We set out to become top three. Today, we positioned HEXO as No. 1," Sebastien St-Louis, Hexo's chief executive and co-founder, told analysts on a call.
"For those of you who don't know Redecan, it may be the … best-kept secret in the industry to many investors, but it's a clear favourite amongst Canadian cannabis consumers."
Prior to the Redecan announcement, Hexo said it was third-largest in the adult-use market. The company now says Redecan will make Hexo the volume leader in dried flower across premium, mainstream and value price points and give it the No. 1 position in Alberta, B.C., Quebec and Ontario.
The Redecan deal will give Hexo a 17 per cent market share, followed by Tilray Inc. with 15.5 per cent, 14 per cent for Canopy Growth Corp. and 6.5 per cent for Aurora Cannabis Inc., Desjardins Securities analyst John Chu said in a note to investors.
The agreement will also introduce Redecan's oils, capsules, pre-rolls and vapes to Hexo's growing portfolio of vapes, flowers, edibles and expanding line of cannabis beverages it produces with Molson Coors Canada under the Truss Beverage Co. banner.
“We are going to take that pre-roll technology that Redecan has perfected and … we're going to scale it," St-Louis said.
Hexo has been intensifying its efforts to introduce more consumer packaged goods categories to its portfolio and increase its hold on the market.
The company announced earlier this month that it would also purchase 48North Cannabis Corp. for $50 million, handing the company a cosmetics foothold with body oils and creams, bath salts and even intimacy oils.
In February, it said it would spend $235 million to buy Zenabis Global Inc. and its Namaste, Re-Up, Blazery and Founders Reserve brands.
The deals are meant to fortify Hexo's portfolio so it's ready to compete in the event that the U.S. federally legalizes cannabis.
The U.S. has been edging toward national legalization for months and is exploring a series of regulatory changes that would make it easier for cannabis companies to bank and operate in the U.S.
St-Louis intends for Hexo and Redecan to provide pre-rolls to the U.S. as soon as legalization allows and said he is currently conferring with lawyers to figure out how to get into the market "sooner rather than later."
In anticipation of legalization, Hexo's rivals Tilray and Aphria Inc. merged, Canopy Growth snatched up Supreme Cannabis and Ace Valley Cannabis and Sundial Growers Inc. said it will buy Inner Spirit Holdings Ltd.
Hexo's Redecan deal has a 24-month lockup period for Redecan shareholders, who will hold about 31 per cent of Hexo's outstanding common shares and get to nominate two people to serve on Hexo's board.
There is also a break fee if the deal doesn't move forward and Chu said "there is the possibility of a rival bid as Redecan has had discussions with other parties."
When asked about whether Hexo could be outbid, chief financial officer Trent MacDonald stressed that the deal is "strong."
"They've had their choice of dance partners," he said. "I think any other licensed producer would have gained a lot of value by doing a deal with Redecan."
Hexo and Redecan's deal is expected to close in the third quarter of 2021 and is subject to regulatory approvals.
The deal announcement caused Hexo's stock to surge nearly 15 per cent to $9.04 by mid-morning, but hovered around $8.48 in later trading.
This report by The Canadian Press was first published May 28, 2021.
Companies in this story: (TSX:HEXO, TSX:ZENA, TSX:WEED, TSX:ACB)
Tara Deschamps, The Canadian Press