Hexo to acquire cannabis competitor Zenabis in $235M deal, aiming for European expansion

Hexo Corp. will acquire competitor Zenabis Global Inc. in $235-million deal that will give the cannabis company a European foothold and strengthen its domestic business.

"Hexo's growth strategy includes expanding our global presence, and this acquisition is an important step in that direction," Sebastien St-Louis, Hexo's chief executive and co-founder, said in a statement Tuesday.

The deal, which will see Hexo acquire two indoor growing facilities and get access to a greenhouse, comes as the Canadian pot market is starting to consolidate amid talk of potential U.S. cannabis legalization.

Tilray Inc. and Aphria Inc. are set to merge later this year, after rumours suggested Aurora Cannabis Inc. was circling Aphria.

Under the agreement Tuesday, shareholders of Vancouver-based Zenabis will receive 0.01772 of a Hexo common share in exchange for each Zenabis common share held.

The companies said the ratio is a 19 per cent premium based on the 20-day volume-weighted average price of Zenabis' and Hexo's common shares.

Hexo believes its deal will help the company go head-to-head with these rivals, access the European medical cannabis market through Zenabis' partnerships, and result in estimated annual savings of about $20 million within one year of the agreement being complete.

Meeting 'growing consumer demand'

"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," Shai Altman, Zenabis' chief executive, said in a statement.

Pot companies have been eyeing international markets in recent months as they realize domesticdemand for recreational cannabis is lower than anticipated and that the illicit market has continued to flourish even after legalization.

These companies have been seeking European Union Good Manufacturing Practices certification a standard required for companies wanting to export cannabis to Europe.

They've also turned their attention to the U.S., where President Joe Biden has spoken in favour of legalization and the Democratic party is pushing a bill that will allow financial institutions to work with cannabis companies without retribution.

"It isa major transaction but not surprising," given recent news about Aphriaand Tilray and speculation the Biden administrationcould support more relaxed cannabis laws, said Jay Rosenthal, co-founder and president of Business of Cannabis, which provides industrynews and analysis.

"These things are going to happen more and more frequently as the market, certainly in Canada shakes out, but as more opportunities happen around the globe, most notably in the U.S."

Biden's presidency has caused pot stocks to climb and the deal announced Tuesday only added to the spike.

Shares up for both companies

Both Hexo and Zenabis's stocks were up by almost 20 per cent in early afternoon trading in Toronto, bringing Hexo's to $11.19 and Zenabis' to 18 cents.

By late afternoon, Hexo shares maintained the increase, while Zenabis shares were up by about 16per cent.

Their deal was already unanimously approved by each company's board of directors, but will require the support of at least 66 per cent of Zenabis shareholders to move forward.

If Hexo backs out of the deal it will have to pay Zenabis a $6-million termination fee.