Hexo Corp. (TSX: HEXO) (NYSE: HEXO) is buying competitor 48North Cannabis Corp. (TSX-V: NRTH) in a $50-million all-stock deal that continues the Ottawa-based pot company’s recent acquisition spree.
Hexo said Monday that buying Toronto-based 48North will help the firm get closer to its goal of achieving a top-two position in the Canadian recreational cannabis market.
“48North’s innovative product portfolio complements Hexo’s existing brands which, combined with their additional market penetration, will further strengthen Hexo’s position,” CEO Sebastien St-Louis said in a statement.
The deal comes on the heels of the company’s recent agreement to buy another struggling rival, Zenabis Global Inc. (TSX: ZENA), for $235 million in stock. That deal is expected to close June 1.
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As competition continues to rise in the slowly expanding Canadian cannabis market, more companies are turning to acquisitions to support their growth strategy.
This year, Tilray Inc. (TSX: TLRY) (Nasdaq: TLRY) merged with Aphria Inc., while Sundial Growers Inc. (Nasdaq: SNDL) bought retail chain Inner Spirit Holdings Ltd. (CSE: ISH) (OTCQB: INSHF) and Canopy Growth Corp. (TSX: WEED) (Nasdaq: CGC) scooped up Supreme Cannabis Co. (TSX: FIRE) and private operator Ace Valley.
Many of these deals have been characterized by industry watchers as the weak attempts of unprofitable firms trying to buy their way out of problems.
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The wave of consolidation also marks a significant transition period for the industry as companies try to address nationwide supply gluts.
The total volume of unsold dried cannabis inventory held by federal licence holders, provincial distributors and retailers in December was 1,141,000 kilograms, according Health Canada’s most recent data.
48North drying room at the companies facility in Brant County, Ontario. Press Photo
In March, 48North said it would lay off about 20 per cent of its staff and end outdoor cultivation at its facility in Brant County, Ontario.
The company noted that last year it cultivated 12,000 kilograms of dried cannabis at a cost of $0.25 a gram outdoors at its now-closed Good Farm, compared to indoor growers that often spend $2 a gram.
But analysts said 48North failed to successfully market its organic farm-grown weed in the super competitive extracts market. Also, the firm had difficulty selling the mid-tier flower into provincial distribution boards.
Read more: 48North cuts outdoor production, 20% of staff
Hexo estimates that within one year of closing the 48North deal will help it generate up to $12 million worth of accretive synergies through cost reductions, additional capacity use at its Belleville facility, as well as selling, general and administrative savings.
The company also believes the deal will help Hexo move closer to reporting positive earnings and position it to keep growing brands internationally.
Under the deal, shareholders will receive 0.02366 of a Hexo common share for each 48North common share.
The exchange ratio implies a 20-per-cent premium per 48North common share based on the 10-day, volume-weighted average price of 48North and Hexo common shares as of market close on May 14.
As of Monday, 48North’s market capitalization reached just above $36 million.
The firm’s market cap had hit an all-time-high of $312 million on March 1, 2019, before investors began bailing on previously-hyped Canadian pot stocks.
Under the deal’s terms, Hexo says it will provide 48North with a $5-million subordinated secured bridge with a six-month term to fund 48North’s short-term working capital requirements. The agreement includes a $2-million fee 48North will have to pay Hexo if the deal is terminated.
The deal has been unanimously approved by both company’s boards, but still needs a two-thirds majority vote by 48North shareholders.
Shares of Hexo fell 1.6 per cent Monday to $7.27 on the Toronto Stock Exchange.
48North stock dropped 8.6 per cent Monday to $0.16 on the TSX Venture Exchange.
jared@mugglehead.com
