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.<\/p>\n
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.<\/p>\n
The arrangement will see Tilray issue 0.4352 shares of its stock for each outstanding Hexo share.<\/p>\n
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.<\/p>\n
"Together we have the assets and the operating expertise to build a stronger Canadian platform that takes advantage of clear opportunities to deliver stronger top line growth and increase our market share," he said on a Monday call with investors.<\/p>\n
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.<\/p>\n
However, their transaction must be okayed 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.<\/p>\n
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."<\/p>\n
"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.<\/p>\n
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.<\/p>\n
"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.<\/p>\n
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.<\/p>\n
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 top line sales but impacting the bottom line.<\/p>\n
"No question, the Canadian government has been the most profitable cannabis business in our industry," Simon said.<\/p>\n
He says there are around 1,000 competing licensed producers, with at least 300 added since last year.<\/p>\n
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.<\/p>\n
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.<\/p>\n
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.)<\/p>\n
"I am not happy at all about our stock price," said Simon.<\/p>\n
"I don't think it truly reflects what the value is that we are building for our shareholders today."<\/p>\n
This report by The Canadian Press was first published April 10, 2023.<\/p>\n
Companies in this story: (TSX:TLRY; TSX: HEXO)<\/p>\n
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