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Why Tilray Stock Sank and Moved the Canadian Cannabis Market Today

Motley Fool - Tue Apr 11, 2023

What happened

Tilray Brands(NASDAQ: TLRY) shook up the cannabis sector with its third-quarter fiscal 2023 earnings report last night. But it wasn't the results that many were focused on, as both Tilray and fellow Canadian cannabis company Hexo(NASDAQ: HEXO) shares dropped today. As of 11:15 a.m. ET, Tilray shares were lower by 7.1%, while Hexo stock was plunging by 26.5%. The moves were spurred by the announcement of a deal for Tilray to acquire Hexo in an all-stock transaction.

News of that deal also moved Canadian peer Organigram Holdings(NASDAQ: OGI) shares this morning. Organigram's stock spiked nearly 6% on the buyout news. Then it lost that gain and was down 1.7% by that same time.

So what

The big drop in Hexo shares was because Tilray is buying that company for about $56 million, while Hexo was trading at a market cap of over $70 million prior to the announced deal. For a bit more perspective, though, Hexo shares had surged higher prior to the announcement. The purchase price of about $1.20 per share is not far from where Hexo stock started the week at $1.26 per share.

The acquisition is an all-stock transaction, which is partly why Tilray shares are dropping today, as well. The other reason is that the company reported disappointing quarterly results.

Jars on a counter at a marijuana dispensary.

Image source: Getty Images.

Now what

Tilray reported quarterly revenue of $146 million, up just 2% over the comparable prior-year period. It also showed a net loss of about $1.2 billion for the quarter. However, investors who focused on that bottom-line number may have overreacted.

The company said it was taking a $1.1 billion non-cash charge "resulting from higher interest rates and a decline in market capitalization." That represented the vast majority of the net loss. Tilray clarified that the impairment charge did not affect its cash flow or liquidity.

The Hexo acquisition will add operations and distribution assets that Tilray refers to as "low-cost." It will also boost revenue and result in a Canadian market share of about 13% for the company.

Tilray had already agreed to acquire $211 million in senior secured convertible notes that Hexo previously issued early last year, so the $56 million price tag should be put in that perspective, as well. Tilray didn't see the gains from that early investment in Hexo that it had hoped for.

The buyout seemed to excite investors in Organigram, at first. But investors erased gains in that stock and are now waiting for that company to report its quarterly earnings after the closing bell today.

The combination of Tilray and Hexo seems to make sense with Tilray expanding its footprint and market. Whether it can do that profitably is what will determine whether Tilray shares can move higher from here.

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Howard Smith has positions in Tilray Brands. The Motley Fool has positions in and recommends Organigram. The Motley Fool recommends HEXO Corp. The Motley Fool has a disclosure policy.

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