HEXO stock soars after Newstrike acquisition

Cannabis producer HEXO buys out Newstrike in $263 million stock deal

Under the terms of the agreement, Gatineau, Quebec-based Hexo will pay 0.06332 of a share for each Newstrike share.

HEXO's revenues come largely from the Quebec recreational cannabis market - for its latest quarter ending October 31, 2018, the company brought in a net revenue of $3.7 million, and shipped 952 kilograms of dried flower equivalents to the adult-use market, most of which went to fulfill its supply agreement with Quebec's provincial distributor. The estimation only accounts for the Canadian cannabis market. The company offers dried cannabis under the Time of Day and H2 lines; Elixir, a cannabis oil sublingual mist product line; and Decarb, an activated fine-milled cannabis powder product.

"Following a thorough assessment of security providers, we are satisfied that the world-class security services provided by Thomas and his expert team at 3 Sixty are the best choice to ensure the safety of our facilities and products", said Jay Wilgar, CEO of both Newstrike and Up Cannabis.

The executive said he is fully confident the deal with go through due to the established support. While Hexo does not indicate how many grams are now in inventory, it notes that it expects to yield 12,871KG of product based on current growth, which compares to 4,938KG harvested during Q2.

"I think Hexo has been doing things the right way for a long time, we certainly have now a reputation for execution and also good governance that allows partners of RBC's status and of Molson's status and other Fortune 500s to come to the table", he said.

The deal still requires approval by Newstrike shareholders, as well as regulatory court and stock exchange approvals.

Ontario has set a goal of April 1 for the official opening of the debut for retail stores. That is a "significant discount to the Canadian [licensed producer] average transaction premium of 29 per cent", Eight Capital analyst Graeme Kreindler said in a Wednesday afternoon note to clients, adding the deal "underscores a shift" in the cannabis M&A world.

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While the acquisition would give Hexo a stronger foothold in Canada, Lake says that the firm is also looking at cannabis market openings in Latin America, the United States and Europe.

In January, Inner Spirit Holdings reported its marijuana dispensaries in Alberta and Saskatchewan made sales of C$583,597.

Newstrike had previously signed agreements with Manitoba, Prince Edward Island, Nova Scotia, Ontario and Alberta.

Shares of both producers rallied on Tuesday based on the announcement. (NYSE: HEXO) generated a change of 6.63% (Gain, ↑) and closed at $5.95. Upon completion of the transaction, existing HEXO and Newstrike shareholders would own approximately 86% and 14% of the pro forma company, respectively, on a fully-diluted basis.

HEXO Corp., through its subsidiary, HEXO Operations Inc, produces, markets, and sells cannabis in Canada. "We look forward to working closely with the leadership team to complete this transaction".

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