Two of Canada’s major cannabis producers are coming together after Tilray Brands agreed to take on $211 million of debt from HEXO, a resolution that will allow the latter brand to shake off its “crippling overhang” by providing Tilray with “significant equity ownership position,” according to a press release.
“We believe this proposed transaction would be a win-win for Tilray Brands and HEXO as it would launch a strategic partnership between two leading Canadian cannabis producers with complementary brand portfolios,” said Irwin D. Simon, Tilray Brands’ Chairman and CEO. “For us, it provides a path for meaningful future equity ownership of HEXO, and enables us to participate in HEXO’s share price appreciation as it continues to execute on its growth initiatives.”
Tilray, the world’s largest cannabis company, is expecting to realize further commercial and production efficiency savings of up to C$50 million within two years, which would be shared equally. Along with cost saving synergies, the companies are examining potential efficiencies in processing, procurement, shared services and development of “Cannabis 2.0” products, which includes beverages and edibles.
The amended notes will allow Tilray to convert at a price of 90 Canadian cents (71 cents U.S.) per share. The restructuring allows HEXO to eliminate its monthly cash redemptions, a provision that allows debt holders to demand up to $20 million per month if the company’s stock price falls below $1.50. The terms were part of its $360 million senior secured convertible notes offering earlier this year.
Despite continuing to make acquisitions, highlighted by its C$925 million purchase of cultivator Redecan, HEXO has been in turmoil over the past 12 months, with spiraling costs and a sliding share price hampering the company as it tried to implement a plan to reduce expenses by 30% ($175 million) by the end of 2023 via a combination of cost reductions and anticipated organic revenue growth.
In February, the company confirmed it had made immediate changes to its board; according to a Reuters report, the move is part of a deal with activist shareholder Adam Arviv, who had been tagged in media stories as the man behind the ouster of Hexo co-founder and CEO Sebastien St-Louis in 2021 following a dispute over its purchase of Redecan. Now under the leadership of CEO Scott Cooper, formerly of Truss Beverage Co., the brand announced plans last month to generate savings of around $15 million by slashing 180 jobs in Canada.
In a deck outlining the deal, HEXO reported that it expects to realize “significant incremental cash flow” of around C$175 million within the next four quarters, to be split evenly between cost reductions and incremental revenue opportunities.
Both companies retain an interest in cannabis beverages. Tilray had a partnership with Anheuser-Busch InBev aimed at researching THC (tetrahydrocannabinol) and CBD (cannabidiol) infused drinks, however, that ended earlier this year. Tilray owns the SweetWater, Green Flash, and Alpine craft beer brands in the U.S. and has designs on eventually launching SweetWater branded cannabis offerings in Canada.
Meanwhile, Hexo launched a similar joint venture with Molson Coors in 2018. The company established a U.S. production base in Fort Collins, Colorado, in June 2021.
Simon recently joined Brewbound Frontlines to discuss Tilray’s U.S. ambitions. Follow this link to watch the conversation.