Quebec cannabis giant HEXO acquires Newstrike Brands in $260-million deal

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Quebec cannabis giant HEXO Corp. is acquiring Newstrike Brands Ltd. — the Oakville-based mid-sized cannabis company backed by The Tragically Hip — in an all-stock deal worth $260 million, both companies announced early Wednesday morning.

The deal is the biggest yet to take place between two sizeable Canadian cannabis companies post-legalization in a crowded industry where the top two players — Aurora Cannabis Inc. and Canopy Growth Corp. — control just under 50 per cent of domestic recreational cannabis sales.

HEXO currently has a market value of almost $1.6 billion — the acquisition of Newstrike will increase the company’s distribution footprint from three to eight provinces, and potentially propel it to become one of the top four biggest cannabis companies in Canada, after Canopy Growth, Aurora, Aphria Inc. and Tilray Inc.

“We’re adding $55 million in cash to HEXO with this acquisition, and this is in line with our vision to be in the top 3 cannabis companies worldwide,” said Sebastien St. Louis, HEXO’s Chief Executive Officer.

“We started conversations last October, and it was a relatively quick process because our visions were aligned. We’re excited about Newstrike’s agreement with the Neal Brothers to create specialty products for the edibles market and so that joint venture will be integrated into this acquisition,” St. Louis explained.

Canada embarks on its second phase of legalization in a matter of months — cannabis edibles, beverages and concentrates are set to hit the recreational market this October.

HEXO’s revenues come largely from the Quebec recreational cannabis market — for its latest quarter ending Oct. 31, 2018, the company brought in a net revenue of $3.7 million, and shipped 952 kilograms of dried flower equivalents to the adult-use market, most of which went to fulfill its supply agreement with Quebec’s provincial distributor. The company sits on a 1 million square-foot greenhouse in Gatineau, Que. which yields over 14 tonnes of cannabis annually, according to corporate disclosures.

Newstrike currently has two cannabis facilities in Ontario — an indoor grow room in Brantford, and a greenhouse in Niagara. Both facilities are licensed to cultivate and sell cannabis for the recreational market under the UP Cannabis brand. Newstrike’s most recent quarterly report ending Sept. 30, 2018 showed that the company realized a revenue of just over $3.4 million to the adult-use market.

“We’ve always recognized that to become a dominant player in the Canadian cannabis sector we needed a strong partner,” said Newstrike CEO Jay Wilgar. “You look at our partnership with the Hip, with the Neal Brothers and then you look at HEXO’s partnership with Molson Coors… putting these two companies together makes an enormous amount of sense.”

Tragically Hip members Johnny Fay, Paul Langlois and Rob Baker (left to right) at Newstrike’s Up Cannabis grow room in Brantford, Ontario.

HEXO is one of very few pot firms that have struck coveted deals with alcohol, tobacco and pharmaceutical companies over the last six months — Cronos Group announced a $2.4 billion investment from tobacco giant Altria Group last December, while Tilray Inc. partnered up with Swiss drug giant Novartis AG around the same time to develop and distribute medical cannabis.

Both Wilgar and St. Louis are confident that the merger of both companies will generate a combined revenue of $400 million by mid-2020.

“Everytime we have committed something to the market, we have delivered. We announced that by December 2018 we would have 1 million square foot up and running, and we met that promise and we got all our licenses in under a year,” St. Louis said.

Wilgar declined to elaborate on what his specific role would be post-acquisition, but maintained that he would continue to be actively involved in Newstrike.

HEXO’s stock price closed at $7.40 Tuesday evening, while Newstrike’s hovered at the $0.45 mark. The Quebec company’s acquisition of Newstrike is the second big transaction to take place between cannabis companies post-legalization — in December, Aleafia Health Inc. acquired medical cannabis producer Emblem Corp. for $173 million.

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