Cannabis company Tilray to buy rival Hexo in all-share deal

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LEAMINGTON, Ont. — Tilray Brands Inc. is buying fellow cannabis company Hexo Corp. in an all-share deal valued at US$56 million aimed at helping the business navigate a "challenging" cannabis market that has seen significant price compression.

The deal announced Monday will unite Leamington, Ont.-based Tilray, which is behind Broken Coast, RIFF, Solei and Good Supply, with Gatineau, Que.-based Hexo, known for its Redecan, Original Stash and Bake Sale brands.

The arrangement will see Tilray issue 0.4352 shares of its stock for each outstanding Hexo share.

Tilray chief executive Irwin Simon positioned the deal as way to increase the company's market share, broaden their product offerings and deliver at least $25 million in additional cost savings on an annualized basis.

"Together we have the assets and the operating expertise to build a stronger Canadian platform that takes advantage of clear opportunities to deliver stronger topline growth and increase our market share," he said on a Monday call with investors.

The arrangement structured as a merger builds on a strategic alliance the two companies struck a year ago, after Tilray acquired US$193 million in senior secured convertible notes originally issued by Gatineau, Que.-based Hexo to HT Investments MA LLC.

However, their transaction must be OK'd by the courts and receive the support of about 66 per cent of Hexo shareholders at a forthcoming meeting. The companies expect the deal to close in June.

Their merger came as Simon conceded that the global cannabis industry continues to be "challenging," particularly for companies like Tilray which are striving to be "low-cost producers."

"I've been doing this for a long time and the cannabis industry is no easy industry, but there is no easy industry," Simon said.

He blamed some of the sector's struggles on the U.S.' slow move toward federal legalization, as well as a high number of licensed producers and "exorbitant" excise taxes. But he said the biggest hurdle facing the cannabis industry is a series of deep price drops.

"Canada's most notable challenge is price compression, which impacted us by US$28 million year to date, almost all which drops to the bottom line," he said.

Tilray took a US$26 million hit to its earnings before interest, taxes, and amortization over the last nine months because of price compression, Simon added.

The company simultaneously paid $120 million in excise taxes and corporate income tax in the last year to the Canadian government, with the majority coming from topline sales but impacting the bottom line.

"No question, the Canadian government has been the most profitable cannabis business in our industry," Simon said.

He says there are around 1,000 competing licensed producers, with at least 300 added since last year.

Competing with those other producers left Tilray to report a net loss of US$1.2 million for the quarter ending Feb. 28, compared with a net income of US$52.5 million for the same quarter last year.

Net revenue came in at US$145.6 million for its third quarter compared with US$151.9 million for the same quarter last year.

The company's shares were up almost seven per cent to $3.73 on Monday, though Tilray revealed its Hexo deal and earnings after markets closed. (Hexo's stock was up about 31 per cent at $2.23.)

"I am not happy at all about our stock price," said Simon.

"I don't think it truly reflects what the value is that we are building for our shareholders today."

This report by The Canadian Press was first published April 10, 2023.