HEXO Stock Up +5% After Production Increase and Newstrike Acquisition

Cornelia Mascio
Marzo 16, 2019

"Jay Wilgar (CEO of Newstrike) and his team have built incredible relationships, including teaming up with The Tragically Hip, and they share HEXO's vision of bringing exceptional branded cannabis experiences to adults everywhere", said Sebastien St-Louis, HEXO's CEO and co-founder.

Consolidation continues in the marijuana public space as Hexo (NYSE-A:HEXO, TSX:HEXO) buys fellow licensed producer (LP) Newstrike Brands (TSXV:HIP, OTC Pink:NWKRF).

The move has been approved unanimously by both companies' board of directors, though it still requires approval from 66% of Newstrike's shareholders to move forward.

HEXO's revenues come largely from the Quebec recreational cannabis market - for its latest quarter ending October 31, 2018, the company brought in a net revenue of $3.7 million, and shipped 952 kilograms of dried flower equivalents to the adult-use market, most of which went to fulfill its supply agreement with Quebec's provincial distributor.

This is a positive step for HEXO, as the acquisition gives the cannabis company the ability to produce around 150,000 kgs of high-quality cannabis a year. "Our strength in Ontario and English Canada clearly complements Hexo's strong position in Quebec and creates an industry leader".

The organization has the market capitalization of $1.15B. Last fall the company announced plans to set up a production site in Greece. Newstrike is a licensed cannabis grower and distributor that has been working on developing "high-quality cannabis brands". That is a "significant discount to the Canadian [licensed producer] average transaction premium of 29 per cent", Eight Capital analyst Graeme Kreindler said in a Wednesday afternoon note to clients, adding the deal "underscores a shift" in the cannabis M&A world.

Ontario cited a "national shortage" of regulated cannabis when it scaled back the rollout of brick-and-mortar outlets late previous year to 50 across the province.

On Wednesday (March 13), the two firms confirmed the acquisition plan, with an overall transaction valued at C$263 million, a figure slightly below Newstrike's market capitalization of C$275.9 million. However, Aurora later launched a hostile-takeover bid of CanniMed and after a months-long battle, the two companies signed a friendly deal, abandoning the plans to acquire Newstrike.

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In January, 5,330 kilograms of dried cannabis was sold through regulated channels across the country, down 4.5% from December 2018. "We're extremely proud of our record of execution".

Newstrike shareholders will receive 0.06332 of a HEXO common share in exchange for each Newstrike common share held, according to a press release put out by both companies. 3,800,606 shares traded hands during mid-day trading, an increase of 116% from the average session volume of 1,759,574 shares.

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