Hexo Corp. Chief Executive Officer Charlie Bowman believes that next year will be a busy one for cannabis dealmakers as he expects private equity firms to increasingly wade into the sector to consolidate underperforming companies.

“This industry, if you take a look at the asset values and what the multiples are right now, the market caps, private equity could come into this industry and sweep it up very quickly and do a roll-up strategy,” Bowman said in an interview with BNN Bloomberg. “I see that in 2023 and more suppliers go out. I think you’ll see more roll ups come in, especially from the large [licenced producer] standpoint.”

 

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While Canada’s cannabis sector hasn’t seen a significant amount of merger and acquisition (M&A) activity this year with retailers experiencing the bulk of transactions due to the hypercompetitive nature of that part of the industry, legal marijuana producers have frequently filed for creditor protection after being unable to agree to any merger deals. Viridian Capital Partners, a cannabis-focused consultancy, said that M&A volume so far in 2022 is down more than 80 per cent with only US$4.87 billion in consideration and 166 deals closed compared to US$24.7 billion in transaction volume on 302 deals in 2021.

That could change next year if more private equity firms see an opportunity to tackle the high-flying cannabis sector. While the space remains highly regulated and institutional investment remains mostly on the sidelines due to the U.S. federal illegality of the drug, Bowman said that there are aspects of the industry that would appeal to opportunistic private equity firms looking to make a splash in the industry.

“I came from private equity and so did our [chief financial officer] Julius [Ivancsits] and one of the things they look for is unique products where they can have a nice rollup strategy to get the infrastructure into a good place,” Bowman said. “The other thing you see in those areas is an area with a sticky customer base. If you think about it from cannabis, as many people have, once people start [consuming] cannabis, they tend to use that as opposed to other recreational (products) like alcohol or even different areas where they get a rush. From that standpoint, I certainly see private equity stepping into this (industry).”

To avoid being part of that roll-up strategy he alluded to, Bowman said that he’s had to clean up Hexo’s heavily-indebted balance sheet while writing down hundreds of millions of dollars of assets by closing its Belleville, Ont. facility and letting its acquisition of Zenabis Global Ltd. eventually announce it would seek creditor protection. Zenabis recently exited creditor protection and was acquired by SNDL Ltd., one of the country’s debtors. Hexo ended its most recent fiscal year with a $1.1 billion net loss and $248 million in debt after striking financing deals with Tilray Brands Inc. and KAOS Capital Ltd., one of the company’s biggest shareholders.

“That’s why we decided to strengthen our balance sheet … It starts at the grow always and then works its way into the consumer products,” Bowman said. “That’s where I think some of the folks got sideways. They started looking at costs, they have old weed, old cannabis that they placed into the market. When you get that, unfortunately you get a bunch of products that aren’t what the consumers are really looking for the be preferred.”

To that end, Bowman said that Hexo has re-positioned its brands in the Canadian market to focus more on its Redecan and Hexo offerings that reflect changing consumer buying habits in the face of high inflation. The company remains in the top three biggest cannabis producers in Canada by market share, but its position continues to be threatened by smaller, more nimble players in the market.

“[People are] buying smaller or they’re buying in bulk and buying once a month. That’s some of the dynamics that you’re starting to see in the industry,” he said.