Hexo Corp. (TSX: HEXO) (NYSE: HEXO) is buying rival Zenabis Global Inc. (TSX: ZENA) in a $235 million all-stock deal that will boost the firm to the top-three position in Canadian cannabis sales.
Ottawa-based Hexo said Tuesday the acquisition gives it an additional 111,000 kilograms of domestic pot production and a foothold in the European medical market.
Correction on Feb. 16, 2021, 3:13 P.M. PST: This article previously and erroneously stated that Zenabis owned and operated a cannabis distribution facility in Malta. However, it has been updated to state that the facility is operated through the company’s joint venture with ZenPharm Ltd.
The deal comes as consolidation increases in the weed sector amid talks of potential U.S. legalization, and increased investor interest.
Last December, Canadian mega-producers Tilray Inc. (Nasdaq: TLRY) and Aphria Inc. said they’ll merge in a $5 billion deal set to close in the second quarter of this year.
This month, global pharma firm Jazz Pharmaceuticals (Nasdaq: JAZZ) said it will buy cannabinoid drugmaker GW Pharmaceuticals (Nasdaq: GWPH) for US$7.2 billion. The proposed deal marks the largest acquisition in the cannabis industry to date and demonstrates how big pharma is recognizing the long-term potential of medical pot.
Besides acquiring two indoor growing facilities and getting access to a large greenhouse in Canada, Hexo says it will gain immediate entry into Europe through Zenabis’s local partner ZenPharm Ltd.
“Hexo’s growth strategy includes expanding our global presence, and this acquisition is an important step in that direction,” Hexo CEO Sebastien St-Louis said in a statement.
Vancouver-based Zenabis has built a medical cannabis distribution network in Europe through its joint venture partner ZenPharm in Malta. The company says it has the ability to ship medical grade weed to the partners’ European facility, which received European Union Good Manufacturing Practice certification last year, from its greenhouse in Atholville, New Brunswick.
However, Zenabis has yet to record cannabis sales in Europe since the joint venture was announced in June 2020. The firm booked a net loss of $127 million in its fiscal year 2020, including over $61 million in impairment charges related to several small acquisitions and inventory write-offs, and has gone through four CEOs since 2018.
Large Canadian producers have been eyeing international supply deals over the past year as the domestic demand for recreational weed has been weaker than expected since legalization began in 2018.
Many companies have been seeking E.U. GMP certification, a requirement for operators wanting to export cannabis to Europe.
Hexo says it might consider other deals to enter the U.S. cannabis market. President Joe Biden has spoken in favour of legalization and the Democratic party is pushing legislation that would allow financial institutions to work with cannabis companies for the first time without penalty.
Pot stocks have rallied since Biden was confirmed president in November, and merger and acquisition deals have also pushed the sector higher in recent months.
In Canada, Hexo says the combined company would be a top-three licensed producer in terms of recreational sales.
The firm added that the deal will result in estimated annual savings of about $20 million within one year of the agreement being complete.
Under the terms of the agreement, Zenabis shareholders will receive 0.01772 of a Hexo common share in exchange for each Zenabis common share held.
The companies said the ratio is a 19 per cent premium based on the 20-day, volume-weighted average price of Zenabis’s and Hexo’s common shares.
Shares of both Hexo and Zenabis climbed double digits Tuesday on the Toronto Stock Exchange. Hexo stock jumped 22 per cent to $11.52, while Zenabis stock rose 16 per cent to $0.18.
Top image via Hexo