Oct 18, 2021
How an investor's letter led to the sudden departure of Hexo's CEO
HEXO CEO Sebastien St-Louis departs company
The ousting of Sebastien St-Louis as Hexo Corp.'s chief executive officer from the pot producer he founded nearly a decade ago came shortly after an investor sent a letter to the board of directors demanding his resignation due to his poor stewarding of the company's finances.
A letter was sent to Hexo's board on Sept. 26 by Adam Arviv, an investor who previously served as an advisor to the family behind Redecan Pharm, the Ontario-based pot producer that Hexo acquired in May for $935 million in a cash-and-stock deal.
The letter states that St-Louis over-leveraged Hexo to help finance deals to acquire "distressed" cannabis operators Zenabis Global Inc. and 48North Cannabis Corp. Arviv and the Redecan ownership group cumulatively own about 70 million of Hexo's shares, making them one of the company's largest shareholders.
"You continuously make negligent decisions and deliver poor financial performance," according to the letter that was obtained by BNN Bloomberg.
"The company has not implemented appropriate operational or financial strategies and its performance has lagged peers and market averages. The executive and board compensation has not focused on the right metrics, the right time frames, or the right targets. The company, under your leadership, has not acted in the best interest of its shareholders."
Hexo's shares have fallen by about 47 per cent over the past year, and about 11 per cent since the letter was submitted to the company's board.
After receiving the letter, Hexo's board met last week to unanimously vote to dismiss St-Louis from his CEO duties, according to one person familiar with the matter.
A Hexo spokesperson told BNN Bloomberg in an email that the company regularly engages in constructive dialogue with shareholders.
"Notwithstanding Mr Arviv's letter, this was the right time to make this change," the spokesperson said. "The departure of Sebastien marks the next stage of the company's strategic evolution. Given Hexo's recent acquisitions, there is a real opportunity for a new leader to leverage Hexo's market-leading position to drive growth and profitability."
Arviv and St-Louis declined to comment when reached by BNN Bloomberg.
“Without question, Hexo's future is bright – I am so proud of the team we established, the brands we launched, and the loyalty our customers have shown us. As a significant shareholder I look forward to the company’s next exciting stage of growth,” St-Louis said in a release.
St-Louis founded Hexo along with Adam Miron in 2013 with a $35,000 line of credit in the early days of the Canadian cannabis industry when the government was just beginning to award cultivation licences for medical marijuana operators.
Since then, Hexo has emerged as one of Canada's biggest cannabis companies. The company was one of the first to strike a partnership deal with a major brewer - Molson Coors Beverage Co. - to create a line-up of cannabis-infused beverages, while it steadily acquired producers like Newstrike Brands Inc., Zenabis, 48North, and Redecan to boost its market share in the hyper-competitive Canadian market.
The company currently holds roughly a 13 per cent share of the Canadian market, good enough for the second-biggest producer behind Tilray Inc. which has about 14 per cent, according to a recent report from BMO Capital Markets.
St-Louis' decision to seek a US$145 million underwritten public offering in August days before the Redecan deal was scheduled to close to close may have contributed to his departure. The announcement led to a 28-per-cent one-day decline in Hexo's stock. At the time, St-Louis told BNN Bloomberg the financing was made to help the company explore a venture in the U.S. market for further growth.
However, Arviv told the board in the letter that the August financing was "further evidence of [St-Louis'] lack of qualified capital market stewardship."
Hexo said in a release that its board has established a special committee to identify the company’s next leader, and said it’s “in advanced discussions with a preferred CEO candidate and expects to make an announcement in the coming days.”
Arviv recommends in the letter the board appoint one of either Hexo Chief Financial Officer Trent MacDonald, company director and head of Groupe Mach Vincent Chiara, or former Redecan co-owner Pete Montour as the new CEO.
Greg Taylor, portfolio manager at Purpose Investments, told BNN Bloomberg on Monday that Hexo's announcement likely reflects a "changing of the guard" with the departure of a co-founder as CEO to one where management is more focused on operations.
"This to me is more of a natural evolution of what's going on in the cannabis stocks," Taylor said in an interview. "We've seen a lot of turmoil from companies that have either gone bankrupt or having to restructure (and) a lot of management turnover already from the initial founders from those that set up the companies and haven't stepped back for operators."
In addition to St-Louis' departure, Hexo said Donald Courtney, the company's chief operating officer, will also leave the company. Courtney will stay on at Hexo until a replacement is found, the company said.
Canaccord Genuity Analyst Matt Bottomley said in a report to clients Monday that the additional announcement of Hexo's COO departing could also be a "potential red flag" ahead of the company’s quarterly results later this month.
Bottomley added that Hexo's sales in its home market of Quebec have declined in recent quarters, and the company has faced production headwinds and some inventory issues with some branded products.