Hexo strikes deal to acquire Zenabis for CA$235M, eyes European cannabis market

Ottawa, Ontario-headquartered cannabis producer Hexo Corp. on Tuesday entered a definitive arrangement agreement to buy struggling competitor Zenabis Global for 235 million Canadian dollars ($185 million) in stock.

The proposed acquisition of Vancouver, British Columbia-based Zenabis would give Hexo a toehold in Europe’s medical marijuana market.

Zenabis shareholders will receive 0.01772 of a Hexo share per Zenabis share under the terms of the proposed arrangement, which represents a 19% premium over the 20-day average as of Feb. 12, the companies said in a news release announcing the planned acquisition.

Both businesses have sold off infrastructure and reported considerable losses in recent years.

Hexo lost CA$4.2 million in its previous quarter and CA$546.5 million in the fiscal year before that.

Zenabis lost CA$40.5 million in the nine months ended Sept. 30, 2020, and an additional CA$127 million in the 2019 fiscal year.

“We are proceeding with this transaction because we believe it should be accretive for our shareholders, and it also positions Hexo for accelerated domestic and international growth while supporting near-term requirements for additional licensed capacity,” Hexo CEO and co-founder Sebastien St. Louis said in a statement.

“Hexo’s growth strategy includes expanding our global presence, and this acquisition is an important step in that direction.”

The deal has been approved by the respective companies’ boards but still requires approval by Zenabis shareholders.

According to Hexo, the combined company would be a top-three licensed producer in terms of recreational sales.

The deal also would give Hexo a foothold in the European medical marijuana market.

“The transaction gives Hexo immediate access to the European medical cannabis market through Zenabis’ local partner, with an established facility in the European Union supplying pharmaceutical products to the European market,” the company said.

According to an investor update by Zenabis last summer, the company also has a deal to supply the growing Israeli and Australian markets.

However, Hexo’s move comes as some rival Canadian companies are scaling back in the European market.

Aurora Cannabis and Canopy Growth, for instance, both reeled in expansion plans in Europe in 2020.

Marijuana Business Daily‘s European report, published last year, estimated Germany’s annual retail sales in 2019 of at least 170 million euros ($200 million). That compares with Canadian expenditures that year of about CA$618 million.

Hexo also said the proposed deal would give it “access to a 2.1 million square feet greenhouse facility, totaling approximately 2.735 million square feet of near-term cultivation space offering diversified growing and production techniques.”

Zenabis also brings with it two indoor production facilities and adds roughly 111,200 kilograms (245,154 pounds) of annual cultivation capacity to Hexo, according to the release.

Less than one year ago, Hexo sold a large greenhouse in Niagara, Ontario, for approximately CA$10.25 million that it previously acquired as part of a CA$263 million deal to buy Newstrike Brands.

Canada is also sitting on a worsening inventory overhang, which reached a staggering 1.06 million kilograms after the country’s first large-scale “croptober” – when most of the fall outdoor harvest comes in.

Late last year, Zenabis reached a conditional agreement to sell one of its facilities in British Columbia for half the original listing price.

Zenabis had CA$4.8 million in cash as of Sept. 30, 2020.

Hexo had CA$149.8 million in cash at the conclusion of its previous quarter ended Oct. 31, 2020.

The company’s shares trade as HEXO on the New York Stock Exchange and Toronto Stock Exchange.

Matt Lamers is Marijuana Business Daily’s international editor, based near Toronto. He can be reached at [email protected].