Cannabis stocks were in focus on Tuesday afternoon as Tilray Brands Inc (US:TLRY, CA:TLRY) announced its latest M&A transaction with rival Hexo Corp (US:HEXO, CA:HEXO) in its sights this time round. News of the deal was initially reported by BBN Bloomberg in the final hour of trading on Monday, sending HEXO shares 30.16% higher into the close and giving TLRY shares a 5.38% bump.
After markets closed, both Hexo and Tilray confirmed the transaction in conjunction with the release of Tilray’s third quarter results.
Under terms of the agreement, Hexo shareholders will receive 0.4352 Tilray share for each share they own, equivalent to around $1.25 per share. The deal is valued at roughly $229 million after incorporating the $193 million of secured convertible notes that Tilray purchased from Hexo’s previous creditor HT Investments back in mid-2022.
In extended trading, HEXO stock gave up 21.34% and TLRY stock retreated 5.47% as the terms were not as favorable as initially speculated in the Bloomberg article.
Dominating Canada
The transaction, aimed at bolstering Tilray’s market dominance in the Canadian cannabis market, is expected to close in the third quarter of 2023. Tilray, which acquired Montauk Brewing in late 2022, has been pursuing targeted growth opportunities to become the leading, most diversified cannabis lifestyle and consumer packaged goods company in the world.
Tilray CEO Irwin Simon said the acquisition of Hexo will help deliver on this vision. “We are incredibly excited about our combined prospects moving forward with Hexo and expect a seamless integration of Hexo’s business into our efficient, built-to-last platform.”
Hexo’s board established a special committee of independent directors that later unanimously recommended that the board approve the takeover offer. Mark Attanasio, chairman of Hexo, said that the deal will benefit shareholders, given the recent headwinds in the cannabis industry.
“Our Board determined that HEXO shareholders would benefit from being part of Tilray’s diversified business and from the strong plan in place they have to reinforce their industry leadership, continue to strengthen the top and bottom lines, and to drive value creation,” Attanasio said.
The transaction is expected to reinforce Tilray’s position as the leading legal marijuana company in Canada, with a market share of 13%, compared to 8% pre-acquisition. It will also see Hexo’s business integrated into Tilray’s platform to improve operating efficiency and profitability while continuing to invest in industry-leading brands.
Hexo shareholders are slated to vote on the deal at a special meeting this June. Although the company’s independent directors, senior officers, and other senior employees plan to vote in favor of the acquisition by Tilray.
Many Advantages
Jefferies analyst Owen Bennett commented on the transaction later on Monday evening highlighting that the deal valuation is at a discount to Hexo’s EV and thinks there is material upside on value creation from deal synergies.
Bennett noted that being market leader with the greatest share will have many advantages to the combined group including; retail leverage, positions the company well for further industry consolidation and greater operational leverage if the Cannabis market price compression continues to ease.
Jefferies has a ‘buy’ call on TLRY with a $6.00 target price.
Fintel’s consensus target price of $4.14 suggests analysts think the stock could rise around 50% over the next year, recovering some of last year’s losses.
Loss Narrows
For the third quarter ended Feb. 28, Tilray reported a fiscal Q3 adjusted net loss of 4 cents per diluted share, narrower than an 8 cents per-share loss a year earlier. Analysts forecast a per-share loss of 6 cents. Reported revenue was $145.6 million, down from $151.9 million a year earlier. Analysts had forecast $150.1 million.
Adjusted EBITDA rose 39% over the year to $14.0 million but fell short of consensus forecasts expecting a figure of around $17.0 million.
At the bottom line, Tilray’s adjusted net loss narrowed by 42% to $23.4 million or negative 4 cents per share. The EPS result was slightly ahead of analyst forecasts for negative 6 cents.
The chart above from Fintel’s financial metrics and ratios page for TLRY shows the improving level of cash from operating activities in recent quarters.
Options Spike
Fintel’s options data for HEXO highlighted a spike in options volume on Monday in the stock.
The table below shows the significant net premium sold from call options trades earlier today. The data indicates that some insiders or people familiar with the matter could have known about the deal terms and capitalized on the share price spike into the close.
While the deal was initially welcomed by Hexo shareholders, it remains to be seen whether the acquisition will deliver on the companies’ promises. There have been a number of challenges facing the cannabis industry in recent years, including regulatory hurdles and a shortage of capital. However, Tilray and Hexo’s leadership teams are optimistic about the deal and its potential to create value for shareholders.
This story originally appeared on Fintel.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
