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How Hexo's CEO sees its $925M bet on Redecan as key to bigger ambitions

Sebastien St-Louis wants Hexo Corp. to be the Coca-Cola of the cannabis industry. Getting there won't be cheap. 

Hexo's latest deal to buy Redecan for $925 million in a cash-and-stock deal​ may be a critical point in making St-Louis's global cannabis ambitions a reality. The company is now a strong contender to be the market leader in Canada's still-nascent cannabis industry and marks the third acquisition it made this year alone in its pursuit of the top spot. 

"We asked ourselves 'Are we are we going to put our money where our mouth is?'," St-Louis told BNN Bloomberg in a phone interview. 

"We're a pretty good operator, we're growing organically, consumers love our products, and we're number one in Quebec, and we're number one is hash. But is that enough? The answer is that it's not enough, and we had to keep pushing until we're number one."

Now that Hexo is appearing to shake off its underdog reputation and square up against its main rivals Canopy Growth Corp. and Tilray Inc., St-Louis' global plans will be put to the test. Depending on the month and what data provider you use, a combined Hexo-Redecan is roughly tied with Tilray and Canopy Growth in the race for the title of Canada's biggest pot producer. 

Now, with Hexo strengthening its portfolio with Redecan's popular brands, and products from recent deals such as 48North's topicals and Zenabis' large-volume offerings, there's an opportunity to sell those brands outside of Canada's borders. St-Louis said he wants to take Hexo's intellectual property - from its hash products to its infused beverage venture with Molson Coors Beverage Co. to Redecan's popular pre-rolls - and apply that to other markets, specifically the U.S. 

"The vision is to walk into any cannabis store, be able to pick up a series of products, whether it's a beer from Molson or an amazing chocolate from a chocolate manufacturer that we all know and the quality of the ingredients is consistent," he said. 

"I believe we can build brand value around 'Powered by Hexo' and we can leverage all the IP and manufacturing expertise we have in Canada that we can have the best quality products in the world." 
Investors cheered Hexo's news on Friday, sending shares of the cannabis giant up more than seven per cent. Some analysts called the Redecan deal "compelling" but maintained a wait-and-see approach to how the company can integrate and take advantage of its recent acquisitions. Desjardins Securities Analyst John Chu highlighted how Hexo closed the facilities it acquired sometime after it bought them from Newstrike Brands Ltd. in 2019.

St-Louis doesn't expect to derive much cost savings from Redecan, which is already profitable despite not disclosing its financial statements, but noted he does expect to see more than $30 million in efficiencies once its deals with 48North and Zenabis close. 

"Redecan is an extremely lean organization. They're well positioned to be one of the most profitable Canadian licensed producers and we don't want to disrupt that," St-Louis said. "They also have a lot of intellectual property that's never been properly registered or monetized."

As Hexo takes a leadership position atop the Canadian market while exploring early ventures in the U.S., selling CBD drinks alongside Molson, St-Louis remains optimistic his company will soon be one of the few "major" cannabis players left that controls the bulk of the Canadian recreational market. His ultimate goal hasn't changed since Hexo was first licensed as a medical marijuana producer in 2015. 

"If I have my way, in eight years from now, we'll be talking about Hexo all the way we talk about other great Canadian companies like McCain's, Saputo and Shopify," he said. "That's where I want to take Hexo, but we need a regulatory environment around export, IP and innovation that allows for that. We have a good framework but it needs to be improved." 

THIS WEEK'S TOP STORIES

Nasdaq adds a pair of Canadian pot companies to its exchange 

The Nasdaq added a couple new Canadian pot companies to its roster. Aurora Cannabis joined Nasdaq's Global Select Market exchange Tuesday, moving away from its previous home on the New York Stock Exchange and helping the company save on costs. Separately, High Tide became the first Canadian publicly traded cannabis retailer to list on the Nasdaq on Friday, listing on the exchange's main "Capital Market". The listings don't impact either of Aurora or High Tide's presence on the Toronto Stock Exchange.

U.S. Congressman re-introduces federal legalization bill to House

The U.S. Congress is taking another kick at the cannabis legalization can after House Judiciary Chair Jerry Nadler reintroduced legislation aimed at removing the plant as a controlled substance. The Marijuana Opportunity Reinvestment & Expungement (MORE) Act, which actually passed a vote in the House of Representatives last year but died in Congress as the current legislative session expired in December, is expected to be approved again, but may be difficult to pass through the Senate. A similar legalization reform bill is set to be introduced by Senate Majority Leader Chuck Schumer. If passed, however, the MORE Act will allow interstate trade and provide for more social justice measures, notably allowing those charged with cannabis-related felonies from working in the marijuana industry. 

Moroccan lawmakers approve new law for local cannabis cultivation

Morocco is inching closer to legalizing cannabis after the country's parliament voted to allow local cultivation for medicinal and industrial use. The decision will allow Moroccan farmers to sell to the government instead of traffickers, which has for years been the main driver of cannabis exports from the North African country. Morocco's King Mohammed VI still has to approve the legislation before it can take effect, while recreational use, sale and production of cannabis will remain illegal. Morocco's illicit cannabis trade is worth as much as US$13 billion, according to estimates tracked by the country's parliament.  

Quarterly Results Wrap: Decibel, Cresco Labs, Auxly Cannabis

Here's a summary of some of the cannabis industry companies that reported quarterly results this week:

• Decibel Cannabis Company: First quarter revenue up 151 per cent to $12.6 million, $2.0 million in adjusted EBITDA, compared to a $418,000 loss a year earlier. Decibel's retail sales were up 13 per cent to $3.2 million.  (Release)  
• Ayr Wellness: First quarter revenue up 74 per cent to US$58.4 million, US$18.4 million in adjusted EBITDA, compared to a US$7.8 million gain a year earlier. The company expects to generate US$90 million in revenue in the next quarter and targets US$725 million in sales in 2022. (Release)  
• Cresco Labs: First quarter revenue up 168.8 per cent to US$178.4 million, US$35.0  million in adjusted EBITDA, compared to a US$8.6 million loss a year earlier.  (Release)  
• Khiron Life Sciences: First quarter revenue up 49 per cent to $2.8 million, $4.0 million in an adjusted EBITDA loss, compared to a $5.9 million loss a year earlier.  (Release)  
• Gage Growth: First quarter revenue up 219 per cent to US$17.6 million, US$3.8 million in an adjusted EBITDA loss, compared to a US$5.7 million loss a year earlier. The company expects to generate between US$26 million to US$31 million in revenue in its next quarter. (Release)  
• Planet 13 Holdings: First quarter revenue up 41.9 per cent to US$23.8 million, US$5.3 million in adjusted EBITDA, compared to a $2.4 million gain a year earlier.  (Release)  
• Auxly Cannabis: First quarter revenue up 1 per cent to $10 million, $6.8 million in an adjusted EBITDA loss, compared to a $8.3 million loss a year earlier.  (Release)

Analyst Call of the Week - RBC Capital Markets on Canopy Growth's Q4

Canopy Growth is releasings its fourth-quarter results Tuesday before markets open. Analysts polled by Bloomberg expect the pot giant to report $153 million in revenue while booking a steep $61.1 million adjusted EBITDA loss. However, some industry observers anticipate Canopy to report a decline in the company's share of the recreational market as rejigging provincial inventory orders and pandemic-related store closures weighed broadly on the industry. Despite the likely revenue hit, RBC Capital Markets Analyst Douglas Miehm said in a note that he expects investors to focus sharply on Canopy's operating and strategic outlook, which including any updates on the company's U.S. expansion plans. Following Canopy's acquisitions of Supreme Cannabis and Ace Valley, Miehm now sees the company reporting calendar 2021 revenue of approximately $814 million. Miehm lowered his price target on Canopy's stock to $42 from $45 given the recent pullback in cannabis valuations.

For more on Canopy Growth, please click here. 

CANNABIS SPOT PRICE: $5.55 per gram -- This week's price is down 0.6 per cent from the prior week, according to the Cannabis Benchmark’s Canada Cannabis Spot Index. This equates to US$2,066 per pound at current exchange rates.

WEEKLY BUZZ

"A lot of growth is going to come from organic elimination of smaller producers."

-- Hexo CEO Sebastien St-Louis in an interview with BNN Bloomberg​ on his outlook for further M&A activity in the Canadian cannabis market.