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Ahead of signing a merger agreement with HEXO Corp. in March, Newstrike Brands Ltd. spent months speaking with other companies, most outside the cannabis industry.

The Niagara-based LP struck a special committee last August to look at potential transactions, according to a Management Information Circular filed on Thursday in relation to the HEXO merger, which details the background to the deal. In September, the Newstrike’s committee retained RBC Capital Markets as a financial advisor.

RBC reached out to 54 different groups, “including nineteen alcoholic beverage companies, five non-alcoholic beverage companies, seven tobacco companies, ten pharmaceutical and health supplement companies, eleven packaged-food, retail and consumer product companies, and two licensed cannabis producers.”

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Five groups, including HEXO, expressed interest, and received confidential information about the company. Although HEXO was the eventual buyer, the fact that RBC canvassed mostly non-LPs points to an evolution in expectations about who is willing to invest in cannabis.

The HEXO agreement was hammered out between November and March, over multiple meetings and site visits. There’s little information about the financial analysis that went into deal. One tidbit, however, is revealing.

“The Financial Advisor noted that HEXO’s offer represented approximately zero premium to Newstrike’s recent historical share price, and that in light of this, a crucial element of the Financial Advisor’s analysis would involve a comparison of Newstrike’s standalone business plan to HEXO’s business plan as it would apply to the combined company,” the circular said.

Newstrike’s committee, in other words, looked at the company's prospects if they went at it alone, and determined it was better to sell out, even for a lowball offer.

By joining with HEXO, the combined company will have increased access to capital due to HEXO’s listing on the TSX and NYSE American, the circular noted. Post-merger, key Newstrike shareholders – including Nik Van Haeren (18.7 per cent ownership) and CEO Jay Wilgar (4.3 per cent) – will also be able to exit their positions more easily, should they desire.

“The number of outstanding shares of the Resulting Issuer will exceed the number of outstanding Newstrike Shares which may provide shareholders with potentially greater liquidity,” the circular noted.

Shareholders representing roughly 30 per cent of Newstrike have already entered into lock-up agreements with HEXO. The deal requires two-thirds approval from Newstrike shareholders. The vote will take place at a meeting will take place on May 17, in Toronto.

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