Tilray Brands, Inc. (Nasdaq: TLRY) is striking up a partnership with Hexo Corp. (Nasdaq: HEXO) by buying $211 million of its debt. The move will bring together Canada’s top two cannabis market share leaders, strengthening their respective positions and setting the stage for increased production efficiencies amid competitive market dynamics. Tilray’s stock was slipping slightly in early trading on the news.
The senior secured convertible notes were issued by Hexo and are currently held by funds affiliated with HT Investments MA LLC. Tilray said that the notes would be amended to permit Tilray Brands to exercise conversion rights at a price of C$0.90 per HEXO Share and acquire a significant equity ownership position in HEXO.
The acquisition of the Notes by Tilray Brands would be immediately accretive to Tilray Brands said the company in a statement. Hexo will not receive any proceeds as a result of Tilray Brands’ proposed purchase of the Notes from HTI.
“We believe this proposed Transaction would be a win-win for Tilray Brands and HEXO as it would launch a strategic partnership between two leading Canadian cannabis producers with complementary brand portfolios,” said Irwin D. Simon, Tilray Brands’ Chairman and CEO. “For us, it provides a path for meaningful future equity ownership of HEXO, and enables us to participate in HEXO’s share price appreciation as it continues to execute on its growth initiatives. We also expect to realize further commercial and production efficiency savings of up to C$50 million within two years, which would be shared equally and would allow us to continue being the leading, low-cost Canadian producer.”
The proposed alliance between Tilray and Hexo is further expected to deliver up to C$50 million of cost synergies, to be shared equally, within two years of the completion of the deal. Both companies have been working together to evaluate cost saving synergies as well as other production efficiencies, including with respect to cultivation and processing services, certain Cannabis 2.0 products, including pre-rolls, beverages and edibles, as well as shared services and procurement.
In December, Hexo warned that the company was in trouble. Hexo noted in its filing that “existing funds on hand, when combined with operational cash flow, would not be sufficient to fund the potential Senior Secured Convertible Note redemption payments. Additionally, the ability to fund capex budgets, convertible debt, and other commitments may be at risk due to cash payments towards the Senior Secured Convertible Note. Management is exploring several options to secure the necessary financing, which could include the issuance of new public or private equity or debt instruments, supplemented with operating cash inflows from operations. Subsequent to October 31, 2021, management has resumed the previous at-the-market public offering. Nevertheless, there is no assurance that certain sources of additional future funding will be available to the company or will be available on terms which are acceptable to management.”