David George-Cosh

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Hexo Corp. is buying privately-held cannabis producer Redecan Pharm in a deal worth almost a billion dollars that marks the latest salvo in the fight to win market share in Canada's hotly-contested legal cannabis industry. 

Under the terms of the arrangement announced Friday morning, Hexo will pay $400 million in cash and $525 million in shares to acquire Redecan. Subsequent to the deal, Redecan shareholders will own 31 per cent of the combined entity and will be permitted to nominate two directors to Hexo’s board. The transaction is subject to regulatory approvals and a vote by Hexo shareholders to approve the share issuance. Hexo said it expects the transaction to close in the third quarter of this year.

“We articulated a plan to become a top three cannabis player in the Canadian adult-use market. With today’s announcement, we believe that we are on the verge of surpassing that objective to become the no.1 licensed producer by recreational market share,” said Hexo co-founder and Chief Executive Officer Sebastien St-Louis in a release.

Canadian cannabis companies entered a period of rampant consolidation over the past six months as an oversupplied market coupled with a highly-regulated domestic industry that is struggling to become profitable has forced some producers to seek growth through M&A. 

The acquisition of Redecan follows a similar strategy employed by Hexo over the past several months to win more market share in Canada's crowded cannabis market, where there are more than 600 licensed producers able to grow or sell legal marijuana. 

The Ottawa-based company said it would buy Zenabis Global Inc. for $235 million in February, which gave Hexo an emerging presence in the European medical cannabis market. Hexo also announced earlier this month it would buy 48North Cannabis Corp. for $50 million. 

To help finance its recent spending spree, Hexo announced late Thursday it raised US$360 million in senior secured convertible notes as well as a new at-the-market equity program earlier this month where it could issue as much as $150 million worth of common shares until June 2023. The company had $129 million in cash and about $60 million in debt as of its most recent quarter, which ended in January. 

Including Zenabis and 48North, a merged Hexo-Redecan company would control about 14 per cent of the Canadian recreational cannabis market, according to data from industry consultancy Hifyre. That would be just below the 18 per cent that Tilray controls and the 14 per cent share that Canopy Growth Corp. would have once it closes its deal to buy Supreme Cannabis Inc., the Hifyre data showed. According to Headset, another industry data provider, a combined Hexo-Redecan company would be the top player in Canada with 17 per cent of the market, followed by Tilray and Canopy with 15.5 per cent and 14 per cent, respectively.

Redecan was founded in 2014 by Rick Redekop and was one of the country's first cannabis producers to obtain a licence from Health Canada to grow medical marijuana. The company also counts the family behind the Grand River Enterprises tobacco empire among its ownership group. 

Since recreational cannabis was legalized in Oct. 2018, Redecan has been among the top sellers of dried flower, pre-rolls and vape products in the legal market. The company generated $58 million in Canadian sales in the three-month period from February to April, according to Hifyre.

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