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Sep 6, 2018

Hexo CEO says sale ‘matter of time’ as activist calls for strategic review

Hexo CEO ‘very confident’ in expansion plans, says sale ‘matter of time’

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Hexo Corp. is coming under pressure from a shareholder who wants the Quebec-based cannabis producer to put itself up for sale.

Riposte Capital LLC went public on Thursday with a letter sent to the company’s CEO and board of directors that calls on them to launch a review of strategic alternatives.

“We – and, we are confident, other like-minded shareholders – believe your success in establishing enviable assets and contracts for Hexo has not translated to success in earning an appropriate equity price and multiple from the investment community for the company's considerable existing and potential value,” Riposte wrote in its letter, which points out Hexo’s multiple is just 8.1 times 2020 consensus EBITDA (earnings before interest, taxes, depreciation, and amortization), as compared to Canopy Growth’s multiple of 89.2 times.

“Moreover, the stock suffers from poor research coverage and investor awareness, a late listing to the TSX, no U.S. listing, and an investor relations effort that needs significant improvement.”

Later Thursday afternoon, Hexo’s CEO said in an interview with BNN Bloomberg that it’s only “a matter of time” before the company is acquired.

“Whether that timeframe is a year or 10 years, my job is to maximize value whatever that timeframe looks like,” Sébastien St. Louis said.

Amanda Lang: Pot producer Hexo maybe isn't undervalued

BNN Bloomberg Amanda Lang discusses calls from an activist investor for marijuana producer Hexo Corp to put itself up for sale.

He added that he expects the company to list on a U.S. exchange by the end of the year, either on the Nasdaq or New York Stock Exchange.

Shares in Hexo, formerly known as Hydropothecary Corp., climbed 20.54 per cent - or $1.21 - to close at $7.10 on the Toronto Stock Exchange on Thursday.. 

New York-based Riposte, which says it’s Hexo’s second-largest shareholder, gave a direct nod to the company’s recently-announced joint venture with Molson Coors Canada, which it says could be “worth multiples” of the company’s total current market capitalization, and says it calculates Hexo’s intrinsic value at $18 per share.

Hexo’s stock has risen 44 per cent so far this year.

“We see it as a testament to your team's operational acumen, as a producer, that Molson Coors indicated that they had conducted thorough due diligence on the sector, met with other much larger competitors, and ultimately selected Hexo based on shared culture and corporate values, a science-based approach with continuity of supplies, innovation pipeline, and track record,” Riposte added.

“That all being said, Hexo still suffers from a low multiple and share price, which is critically important, as it significantly hampers the company in the race for global growth and expansion.”

Riposte says it wants Hexo’s board to launch a review of alternatives at its next board meeting, and that beyond a possible sale, it should also consider a merger with an industry peer, a privatization, or a “meaningful” investment by Molson Coors.

St. Louis told BNN Bloomberg there are plans for expansion and tie-ups, but they haven’t yet been communicated to the market.

“We’re very confident in the development of our plan and we look forward to updating the market with our international expansion strategy,” he said, adding that Hexo is looking to team up with Fortune 500 partners to move into the cosmetics, edibles and vaporizer markets.