HEXO Corp. (TSX: HEXO; NYSE: HEXO) is buying Zenabis Global Inc. (TSX: ZENA) in an all-stock deal valued at approximately $235 million. Zenabis had hinted that such a deal was in the making during its fight with Sundial. In January, the company had said it had started talks with another significant licensed cannabis producer, so it seems Hexo was the company. Zenabis stock has jumped over 18% to lately trade at 14 cents. The combined organization would be a top-three licensed producer in terms of combined Canadian recreational cannabis sales.
“We’re thrilled to welcome the Zenabis team into the HEXO family. Zenabis has built solid relationships and they share HEXO’s vision of bringing exceptional branded cannabis experiences to adults everywhere, in Canada and abroad” said Sebastien St-Louis, CEO and co-founder of HEXO Corp. “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’s growth strategy includes expanding our global presence, and this acquisition is an important step in that direction.”
HEXO estimates that the combined entity may realize annual synergies of approximately $20 million within one year of close, through cost of goods reductions, additional capacity utilization in HEXO’s Belleville Centre of Excellence and selling, general and administrative savings, which, if realized, should allow HEXO to continue its path towards positive earnings. The combination would give HEXO access to licensed capacity to produce approximately 111,200 kg of additional high-quality cannabis annually. It would result in HEXO acquiring two indoor facilities (approximately 635,000 sq. ft.) and access to a 2.1 million sq. ft. greenhouse facility, totalling approximately 2.735 million sq. ft. of near-term cultivation space offering diversified growing and production techniques.
Under the terms of the Agreement, Zenabis shareholders will receive 0.01772 of a HEXO common share in exchange for each Zenabis common share held. The Exchange Ratio implies a premium per Zenabis common share of approximately 19% based on the 20-day volume-weighted average price of Zenabis common shares on TSX and HEXO common shares on TSX as of February 12, 2021. Warrants and incentive securities of Zenabis will be adjusted in accordance with their terms to ultimately become exercisable to receive common shares of HEXO based on the share exchange ratio. The deal was unanimously approved by the board of directors of each of HEXO and Zenabis and Zenabis’ board of directors unanimously recommends that its shareholders vote in favor of the Transaction.
“This is a compelling combination. Our brands and strains strength across Canada, coupled with our international footprint and state-of-the-art low-cost and high-quality cultivation facilities complements HEXO’s business, creating an industry leader. Like HEXO, Zenabis believes that the combination should deliver meaningful synergies, a stronger financial position with increased flexibility, and should position the combined company to meet growing consumer demand on a national and international basis. I believe this transaction is beneficial to our shareholders, customers, partners, and employees. We look forward to working closely with HEXO to complete this transaction,” added Shai Altman, CEO of Zenabis.
Zenabis has been fighting with sundial since December 30, 2020, when Sundial said it had made a strategic investment in Zenabis’ senior lender, which Zenabis said was an attempt to coerce Zenabis into being acquired by Sundial. In a statement, Zenabis said, “Prior to Sundial’s acquisition of the Senior Lender, the company had been in late-stage discussions with the Senior Lender relating to the extension of its obligation to repay $7 million of the principal amount of debt on December 31, 2020. Contrary to the discussions with the Senior Lender prior to the point at which it was acquired by Sundial, the Senior Lender substituted the soon-to-be consummated extension with a demand that the $7 million principal repayment be made on December 31, 2020 accompanied by a forbearance agreement.”
Zenabis also said that the forbearance agreement required it to enter into exclusivity arrangements with the Senior Lender in relation to any sale of the company and also required Zenabis to accept significant potential financial penalties in excess of the outstanding balance of the debt owed to the Senior Lender. The company said that none of the alleged defaults are for failure to make payments of principal or interest. In Zenabis’ statement, “The company believes the Senior Lender’s allegations to be spurious and without merit and intends to vigorously defend against what it considers to be an ill-disguised attempt to circumvent a fair and competitive process to acquire the company by improperly foreclosing the equity of the company or compelling Zenabis to enter into a transaction with Sundial.”