After recently wrapping up a greenhouse expansion project to increase production capacity, HEXO Corp (TSX: HEXO; NYSE-A: HEXO) is now further branching out with a new acquisition.
Today HEXO announced a definitive agreement has been struck with Newstrike Brands Ltd. (TSX-V: HIP), which owns licensed producer Up Cannabis and has previously struck investment partnerships with members of Canadian rock band The Tragically Hip.
That newly-announced agreement will see HEXO acquiring all of Newstrike’s outstanding shares in a $263 million valued all-share deal. Existing Newstrike shareholders will receive 0.06332 shares of HEXO for every current share of Newstrike held if the deal is completed.
Taking into account the big cash balance at Newstrike which will fund capacity growing to 42,000 kg in 2019, HEXO is paying $5.60 per gram of capacity.
HEXO needs to sell Newstrike products for $3.30 per gram with cashflow 25% margins to generate a 10% return on the deal. Considering HEXO makes $5.10 per gram currently, the economics on this deal look favourable.
This is the second cheapest price paid for another producer in Canada with only Tilray’s purchase of Natura Naturals cheaper at $4.70/gram.
The Toronto-based Newstrike formed a special committee to evaluate the acquisition offer, which was subsequently unanimously approved by the company’s board of directors.
Newstrike shareholders still have to formally vote on the deal in an upcoming special meeting, with 66% required to vote in favour before the acquisition is finalized. If the agreement is terminated, the terms of the deal require Newstrike to pay $7.5 million to HEXO Corp.
HEXO’s Chief Executive Officer Sebastien St-Louis had this to say about the acquisition agreement struck between the two companies:
St-Louis further estimated the company would see gross revenue of $479 million for the fiscal year of 2020 following the completion of the Newstrike acquisition.
HEXO and Newstrike both voiced their excitement at the prospect of exploiting the synergy between the two companies, with an expected end result of more efficient operation on both ends.
In particular, HEXO brings existing infrastructure in Quebec while Newstrike covers Ontario and offers significant branding relationships with a well-known rock band.
Acquiring Newstrike’s licensed indoor grow facility and provincial licensing agreements will significantly boost both HEXO’s cannabis production capacity and sales opportunities.
Following completion of the deal and after HEXO’s recent construction update, the company expects to reach a production milestone of 150,000 kg per year.
HEXO is currently gearing up to release Q2 2019 financial results, which will be announced tomorrow — March 14 — morning via a conference call with investors.