Hexo to buy Zenabis in the latest alliance in the cannabis sector that is experiencing an explosion of M&A activity

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Canadian cannabis company Hexo Corp. is acquiring Zenabis Global Inc. in a stock deal worth around C $ 235 million ($ 185.2 million), in the latest merger in a sector that has been experiencing an explosion of mergers and acquisitions activity. Under the terms of the agreement, Ottawa-based Hexo will pay Vancouver-based Zenabis shareholders 0.01772 of a share of Hexo HEXO, + 21.17% HEXO, + 21.21% for each share of Zenabis ZBISF, + 17.50% ZENA, + 16.13% owned, equivalent to a premium of approximately 19% based on the 20-day volume-weighted average price of Zenabis common shares and HEXO common shares in the Toronto Stock Exchange, as of February 12, 2021.

The agreement has been approved by the boards of both companies and will be presented to Zenabis shareholders at a special meeting. Zenabis will face a cancellation fee of Cdn $ 6 million if the deal is canceled. Once the deal closes, Hexo shareholders will own 87.43% of the combined company and Zenabis shareholders will own the remaining 12.57%. Read: Cannabis stocks plummet as recovery fueled by hopes of US legal reforms comes to a sudden halt The new entity will be one of the top three licensed producers in Canada’s legal recreational market by sales. It will also provide Hexo with a foothold in the European medical cannabis market through the local partner Zenabis in Malta, with an established facility supplying pharmaceuticals to the European Union market. The companies expect the deal to generate annual synergies of approximately C $ 20 million within one year of closing. Hexo will have two additional indoor grow facilities of approximately 635,000 square feet and access to a 2.1 million square foot greenhouse facility, for a total of approximately 2,735 million square feet. on weak quarterly earnings and a downgrade to sell “We are proceeding with this transaction because we believe it should be beneficial to our shareholders, and also positions HEXO for accelerated domestic and international growth while supporting short-term requirements for additional capacity with license”. Hexo CEO and co-founder Sebastien St-Louis said in a statement. Jefferies analyst Owen Bennett said that while the deal should come as no surprise, given Hexo’s recent moves to consolidate its shares and appears to be positive, “we wonder if this has been too short-termism driven, and from a short-termism perspective. strategic does. ” we are not really excited. “In the Canadian market, Hexo is not acquiring any value brands, and Zenabis’ main brands are value / discount, as is Hexo’s. The addition of a European presence, although generally positive, is in really just a joint venture, Bennett wrote in a note. “We think Hexo would have been much better positioned to do something in the US After all, it is US optionality that will be critical to maintaining the current multiples of the Canadian sector. , not Canada and Europe, “he wrote. Jefferies rates Hexo underperforming. The deal comes after two recent transactions that caused a sensation., The February 4 news that GW Pharmaceuticals Ltd. GWPH, -0.04%, the first company to gain approval from the US Food and Drug Administration for a cannabis-based drug, is being taken over by Jazz Pharmaceuticals PLC. JAZZ, -0.83% on a $ 7 billion deal. That came after the December announcement of a $ 3.9 billion reverse merger agreement between Tilray Inc. TLRY, + 17.35%, and Aphria Inc. APHA, + 25.56% APHA, + 25.29%, to form the longest cannabis company. largest in the world measured by income. Read now: To benefit from the planned merger of Tilray and Aphria, buy Aphria, says this analyst Also comes after a widespread rally in the cannabis sector fueled by the new US administration The strict US cannabis laws The US continues to classify the plant as a Schedule 1 drug, along with heroin. That classification has hampered the development of the sector, which is limited to those states that have legalized cannabis for medical or recreational use and have kept businesses mostly excluded from the federally insured banking system and capital markets. A change in the law is expected to free up capital and attract many new investors to the space. See: New York is expected to finally legalize cannabis in 2021, as Governor Cuomo does his best for Senate Majority Leader Chuck Schumer, who has pledged to make reform a key part of the current Congress. While it is unlikely that most Canadian companies will benefit from US legalization right away, it will vastly expand the legal market and stocks have been swept up in euphoria. Read Now: Cannabis Stocks Rebound After Chuck Schumer Leads the Campaign for Reforms That May End Federal Ban Both companies’ stocks rose on the news. Hexo was up 14.6%, while Zenabis was up 10%. The Cannabis ETF THCX, + 5.31% was up 5% and the S&P 500 SPX, + 0.01% was flat.