HEXO Corp. Announces C$925M Acquisition Agreement With Redecan
HEXO Corp., an Ottawa, Ontario-headquartered consumer packaging goods cannabis company, announced May 28 its definitive agreement to acquire Redecan, Canada’s largest privately owned licensed producer. HEXO promoted the C$925-million deal as one that will help propel the company to its goal of being the No. 1 licensed producer by market share in Canada.
The acquisition comes on the heels of two other major deals by HEXO this year, including all-share acquisitions of Zenabis Global Inc. to the tune of $235 million in February and 48North Cannabis Corp. for $50 million earlier this month.
Founded in 2013, HEXO’s $925-million acquisition of Redecan will be its largest deal yet, CEO Sébastien St-Louis told Cannabis Business Times.
“Well, I’ve never been afraid of price tags,” he said. “What I look for is what’s the fundamental value. [Redecan] had the best growth in the whole industry. So, 169 percent growth year-over-year. They’re the most profitable licensed producer in the industry. And there was a beautiful product overlap. So, from that perspective, it was a hard opportunity to say no to.”
When the transaction closes—expected in the third quarter of 2021—HEXO will hold approximately 17% of the adult-use market share in Canada, according to St-Louis. That percentage, he believes, would provide HEXO a bigger piece of the Canadian market than the Tilray-Aphria combo, which closed a megadeal earlier this month, he said.
In particular, HEXO will hold top market-share positions in Canada’s four largest markets: Alberta, British Columbia, Ontario and Quebec. Those four providences represent approximately 85% of Canada’s population.
Under the terms of their share purchase agreement, HEXO will pay Redecan shareholders $400 million in cash and $525 million through the issuance of HEXO common shares at an implied price of $7.53 per share.
Redecan has not traditionally had access to the Quebec market, which is where HEXO was founded. Meanwhile, Redecan is far ahead of HEXO in the Ontario market, St-Louis said. From a distribution perspective, there are different retailers and government entities that control those markets.
Also making Redecan attractive to HEXO is its consumer loyalty, St-Louis said.
Redecan is ranked No. 1 in the purchase-to-loyalty conversion metric, with 44% of consumers who purchase Redecan indicating they would repurchase the brand, according to Brightfield Group’s brand health portal for Canada. Redecan is also ranked in the top 10 for converting consumers from awareness to purchase rate, indicating an overall healthy funnel, according to Brightfield data that is fielded quarterly via consumer survey and is normalized on age, gender and province.
It is anticipated that the Redecan shareholders will collectively hold approximately 31% of HEXO’s issued and outstanding common shares immediately following the closing of the transaction, based on the $7.53 price per share value during a five-trading-day period.
Redecan shareholders will receive the right to nominate up to two members to HEXO’s board of directors (within certain parameters) and will be entitled to other customary governance rights, including limited demand and piggyback registration rights, pursuant to an investor rights agreement, according to a HEXO press release.
“Redecan’s unwavering focus on the consumer, along with lean operating principles and highly efficient automated manufacturing technology, have allowed us to establish a significant presence in the Canadian market,” Redecan co-founder Will Montour said in the press release announcing the acquisition. “We’ve now entered a phase where scale is key, and our complementary consumer bases, brand portfolios and distribution relationships can enhance financial performance.”
In addition to dried flower across various price points, HEXO’s portfolio features a cannabis-infused beverage brand, while Redecan has developed a reputation for its oils, capsules and pre-roll “Redees,” St-Louis said.
“We really didn’t step on each other’s toes,” he said. “The crown jewel from an intellectual property perspective their ‘Redees.’ They have put together a technology to make marijuana cigarettes that [are] the best in the world. So, bringing that in as an offering that we then as HEXO can bring into the United States is very exciting.”
HEXO and Redecan’s combined strengths should provide a platform for global growth, leveraging HEXO’s international reach, St-Louis said. HEXO already has a foot in the U.S. market with CBD beverages available in Colorado under its Truss Beverages brand.
While the Canadian market has a bright future, HEXO is positioning itself for future expansion in the U.S. and Europe with the intention of becoming one of the top three largest cannabis companies in the world, St-Louis said.
“If we just hold our market share in Canada, Canadian markets should grow two to three times over the next few years,” he said. “So, there’s a lot of upside just in Canada. But we’re quite focused on the United States right now. We think that there’s an opportunity for us to take a lot of our intellectual property and export that to the United States. So, [we want] to take our product line and do things like pre-rolls for the multistate operators and do things like hash for the multistate operators.”
The acquisition is pending approval from the Competition Bureau Canada as well as HEXO shareholder voters, which St-Louis said he foresees as favorable in closing the transaction.
“Joining the HEXO team will leverage our combined strengths and accelerate our growth within Canada and internationally,” Redecan co-founder Pete Montour said in the press release. “We look forward to building a leading global organization together.”
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