Hexo to acquire 48North in $50,000,000 all-stock deal

·3-min read
Hexo is continuing its appetite for acquiring rivals with a $50 million all-stock deal to buy 48North Cannabis.
Hexo is demonstrating its appetite for acquiring rivals with a $50 million all-stock deal to buy 48North Cannabis. REUTERS/Chris Wattie

Canadian cannabis producer Hexo (HEXO.TO)(HEXO) plans to acquire 48North Cannabis (NRTH.V) in a $50 million all-stock deal. Hexo’s announcement Monday comes on the heels of its deal to buy pot firm Zenabis Global (ZENA.TO) announced in February, adding strength to a wave of consolidation sweeping the sector.

Ottawa-based HEXO said the deal is expected to generate $12 million in annual savings one year after it closes, and will strengthen the company’s position in Canada’s recreational pot market.

“As we continue down our path towards achieving a top two position in Canada by adult-use sales, we are looking forward to welcoming the 48North team into the HEXO family,” Hexo chief executive officer Sebastien St-Louis stated in a news release.

In addition to scale, Hexo said 48North will expand its product portfolio with the addition of topicals, bath and intimacy products. The company said such products provide "a strong base for potential future CPG (consumer packaged goods) partnerships in the U.S., Canada and internationally."

“The combination should deliver meaningful synergies, a stronger financial position with increased flexibility, and should position the combined company to meet growing consumer demand on a national basis," 48North CEO Charles Vennat added in the release.

Under the terms of the deal, 48North shareholders will receive 0.02366 of a Hexo share for each share owned. The company said the ratio is a 20 per cent premium based on the 10-day volume-weighted average price of 48North common shares on the TSX Venture, and Hexo common shares on the Toronto Stock Exchange, as of the close of markets on May 14.

The deal has been unanimously approved by both company’s boards. According to the press release, the transaction does not require approval from Hexo shareholders. At least two-thirds of 48North shareholders must vote in favour of the deal at a special meeting. The companies said 25.9 per cent of 48North’s issued and outstanding common shares are subject to signed voting and support agreements, with commitments to support and vote in favour of the transaction.

The deal also "contemplates" a $5 million loan to 48North within 30-days of the deal closing to fund short-term working capital requirements.

CIBC analyst John Zamparo said Hexo is paying a "materially lower" price to acquire 48North compared to recent deals in the sector, including its deal to buy Zenabis. Other noteworthy deals of late in the sector include the combination of Tilray (TLRY.TO) and Aphria, and Canopy Growth (WEED.TO)(CGC) acquisition of Supreme Cannabis and Ace Valley Cannabis.

"We view this deal positively," Zamparro wrote in a note to clients on Monday. "We look favourably upon M&A within the cannabis sector, as material cost synergies exist, particularly in cultivation, and we believe well-funded larger players can opportunistically acquire smaller firms with capitalization concerns." 

Toronto-listed Hexo shares were little-changed, up 0.41 per cent to $7.43 at 10:36 a.m. ET. 48North shares fell 5.71 per cent to $0.17.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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