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Newstrike, the cannabis company backed by members of the Tragically Hip, has agreed to a friendly takeover by Quebec-based HEXO Corp. in an all-share transaction valued at $263-million, sending shares of both companies higher.

The companies say in a joint statement the deal would give HEXO the capacity to produce about 150,000 kilograms of cannabis annually and to realize $10-million of annual synergies.

HEXO chief executive Sébastien St-Louis, who co-founded the company, said the addition of Newstrike would to take HEXO to the next level on its journey “to become one of the largest cannabis companies in the world.”

“We’re extremely proud of our record of execution, and today are committing to achieving over $400-million in net revenue in 2020,” Mr. St-Louis said in a statement.

Shares of HEXO in Toronto were up nearly six per cent to $7.83 after the deal was announced. On the TSX Venture exchange, Newstrike’s stock was up more than 11 per cent in afternoon trading to 50 cents a share.

The deal announced on Wednesday is the latest sign of consolidation in Canada’s cannabis sector. In December, cannabis company Aleafia announced a deal to acquire licensed producer Emblem Corp. Last year, Aurora Cannabis Inc. acquired rivals MedReleaf Corp. and CanniMed. In November, 2017, CanniMed had announced an all-stock deal to acquire Newstrike. 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.

As part of the deal announced Wednesday, Newstrike shareholders are being offered 0.06332 of a HEXO common share in exchange for each common share held. Based on the value of HEXO shares at the close on Tuesday, the offer would be worth nearly 47 cents per share. The transaction is unanimously supported by the directors of both companies but requires approval by Newstrike shareholders.

RBC Capital Markets is acting as the financial adviser to Newstrike, the latest evidence of Canada’s largest banks warming up to the cannabis sector.

Newstrike also has the right to accept a superior proposal in certain circumstances, with HEXO having the right to match any proposal within five business days.

The proposed deal would result in Newstrike shareholders owning 14 per cent of the combined company, with the rest owned by HEXO shareholders.

That’s about 4 per cent above Newstrike’s closing of 45 cents a share at the close on Tuesday.

The two companies also have established distribution agreements in eight provinces, excluding New Brunswick and Newfoundland and Labrador.

“Our strength in Ontario and English Canada clearly complements HEXO’s strong position in Quebec and creates an industry leader,” Newstrike chief executive Jay Wilgar said in a statement.

“I believe this transaction is beneficial to our shareholders, customers, and employees. We look forward to working closely with the leadership team to complete this transaction.”

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