Canadian pot producer Tilray Brands Inc. on Monday said it agreed to buy peer Hexo Corp. for $ 56 million in an all-stock deal — after years of losses, steep competition and stalled federal reform in the U.S. have weighed on the industry’s growth prospects.
With weed prices falling in Canada, Hexo’s HEXO, +30.16% wrangling with its own finances, a big quarterly loss from Tilray and other industry acquisitions that haven’t panned out, analysts asked management: “Why now?”
“The Canadian market has to consolidate,” Tilray TLRY, +5.38% Chief Executive Irwin Simon said during the company’s third-quarter earnings call on Monday.
He said that Canada’s cannabis industry had more than 1,000 licensed producers. Simon also said that a growth facility run by Redecan, one such producer that Hexo bought in 2021, would be harnessed to lower Tilray’s production costs.
While more producers give customers more options, the lower prices have made it harder for a money-losing industry, still dealing with the fallout of years of growing too much weed, to turn a profit. Market share has been hard to hold, and many of Canada’s highest-profile U.S.-traded companies have closed facilities and laid off staff over recent years. Simon also blamed heavy excise taxes for creating a more difficult financial backdrop.
“No question, the Canadian government has been the most profitable cannabis business in our industry,” Simon said.
The deal with Hexo, expected to close in June, comes after Tilray formed a strategic alliance with Hexo and bought up some of Hexo’s debt last year. That move was intended to help Hexo patch up its balance sheet after struggling with repayments.
Under the terms of the deal, Tilray would issue 0.4352 of its common stock for each outstanding Hexo share. BNN Bloomberg, which reported news of the deal earlier in the day, said that Tilray would acquire Hexo for $ 56 million after exercising $ 173 million in convertible debt it took on from HT Investments, a onetime creditor.
Investors, either way, weren’t impressed. Shares of Hexo — whose market value stood at around $ 73 million, according to FactSet — tumbled nearly 24% after hours on Monday. Tilray fell 5.6%.
“With the recent headwinds in the cannabis industry, our board determined that HEXO shareholders would benefit from being part of Tilray’s diversified business and from the strong plan in place they have to reinforce their industry leadership, continue to strengthen the top and bottom lines, and to drive value creation,” Mark Attanasio, Hexo’s chairman, said in a statement.
Tilray Brands, itself the product of its namesake company and Aphria, has loaded up on other acquisitions in recent years, and not all of them in weed. With cannabis still federally illegal in the U.S. — depriving Canadian companies of directly entering a massive market — it has bought craft brewers Sweetwater and Montauk Brewing Co., the Breckenridge Distillery and hemp-foods maker Manitoba Harvest.
However, TD Cowen analyst Vivien Azer, in a research note last month, flagged “the slowing of the U.S. craft beer market as an additional headwind to 3Q23 revenues.”
Tilray reported net sales of $ 145.6 million during its third quarter, down from $ 151.9 million in the same quarter last year. It reported a net loss of nearly $ 1.2 billion, or $ 1.90 a share, contrasting with a profit of $ 52.5 million, or 9 cents a share, in the prior-year quarter. The net loss, management said, was tied to a quarterly impairment review, triggered by higher rates and a falling market value.
The results were worse than expected. Analysts polled by FactSet expected sales of $ 150 million, and a loss of 5 cents a share.
Shares of Tilray have fallen 57% over the past 12 months. The S&P 500 Index SPX, +0.10% is down 6.8% over that period.