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Cannabis producer Tilray Brands Inc. TLRY-T said it will acquire US$211-million in debt from competitor Hexo Corp., HEXO-T creating a strategic partnership to help both companies benefit from cost savings.

Tilray will acquire the convertible notes from HT Investments MA LLC, a fund run by New Jersey investment management firm High Trail Capital, for 95 per cent of the outstanding principal balance including accrued and unpaid interest.

Once the deal is complete, subject to Hexo shareholder approval, Tilray will have the rights to convert its notes into common shares based on an initial price of 90 cents a share, bringing its ownership in Hexo to about 37 per cent.

Tilray chief executive officer Irwin Simon told The Globe the company “probably will not convert them any time soon,” given one of the terms of the deal: Hexo will pay 10-per-cent interest annually to Tilray, adding up to about $20-million before taxes each year. Half of this amount will be settled in shares after the first year.

The deal comes amid a market that is ripe for consolidation. Mr. Simon did not dismiss the possibility of a full acquisition of Hexo, saying in an analyst call that the deal gives Tilray a good foothold should it decide to do so in the future.

The deal will also help Ottawa-based Hexo reduce its balance sheet after a year of weighty debt repayments accrued as it made several large acquisitions. The convertible notes being acquired were originally issued during Hexo’s August, 2021, takeover of cannabis producer Redecan for $925-million. It also acquired Zenabis Global Inc. for $235-million and 48North Cannabis Corp. for $50-million.

In a statement, Hexo CEO Scott Cooper said the transaction will help the company become cash-flow positive within the next four quarters.

The new terms will free up $80-million in Hexo’s cash that had been restricted under the original loan deal with High Trail.

Both companies will also benefit from the consolidation of some of their administrative and operational functions, which they say will save them a combined $50-million over the next two years.

The acquisition is also subject to approval from regulatory bodies and the boards of directors of both companies.

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