Tilray Brands Inc. announced a deal with Hexo Corp. Thursday that will see the two Canadian cannabis giants strike a strategic partnership linked through a debt deal where Tilray could take a significant minority stake in its main rival. 

Tilray said it will acquire up to US$211 million of Hexo’s senior secured convertible notes currently held by New Jersey-based hedge fund High Trail Capital LP at 90 cents on the dollar that would give it the right to own 37 per cent of the company. 

In addition to the debt deal, the two companies said they will enter into a joint venture that will help the companies both produce pre-rolls, beverages and edibles within the next two years, while leading to $50 million in cost savings.

The deal will also see Kaos Capital Ltd., a Toronto-based investment firm run by Canadian businessman Adam Arviv, provide as much as $180 million in liquidity to Hexo which can be converted into equity at a 10 per cent discount, according to Hexo. 

Arviv has been in the middle of a six-month-long board and management dispute with Hexo in an attempt to restructure the company to help stem a slide in the company’s stock, and recently resolved that fight with two of his proposed directors taking seats on Hexo’s board. 

The deal links two of Canada’s biggest cannabis producers together during a period of rampant competition as smaller, more nimble companies slowly eked away market share from both Tilray and Hexo. Both companies, which have yet to turn a net profit, are also included in an industry-wide effort to cut costs to help improve cash flow challenges that many other pot producers are facing. 

Irwin Simon, Tilray’s chief executive officer, said during a conference call that the deal will strengthen both companies in Canada but also in Europe’s medical cannabis market and, once it is federally legal, the U.S.

“Doing this with Hexo creates tremendous market share opportunities with consumers and helps get the right message out to the market,” Simon said on the call. “There’s a lot of change that’s got to happen in the market place. Working together, we can make that happen.”

Meanwhile, in an interview with BNN Bloomberg, Simon also said that throwing Hexo a financial lifeline – as opposed to letting the company continue to operate under a constrained balance sheet – would help the broader industry out, which is still nascent and awaiting the result of a mandated review into the regulations that legalized cannabis. 

“We’ve got to make sure we’ve got a strong industry out there,” he said, which includes “converting the illicit market into the legal market [or] being able to sell our products whether its in restaurants in beverages, [and] being able to sell our products in convenient stores.”

The tie-up with Tilray will give Hexo “more breathing room” to focus on its own business and develop new products without having to manage an onerous financing deal with an investor, Hexo CEO Scott Cooper said during a conference call. 

Hexo Chair Mark Attanasio said in an interview that the company was looking at strategic alternatives when he took on the role a week ago, but that the deal with Hexo is the best course of action to get the company generating positive cash flow as quickly as possible. 

Hexo struck the convertible deal with High Trail in May 2021 which raised US$360 million in senior secured convertible notes used to acquire Redecan Pharm. 

However, that debt financing deal came with a key covenant that states the company must report positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by the end of January or it will default on its secured debt – terms which have now been amended with the Tilray deal, including removing covenants and extending the maturity by one year. 

Analysts widely praised the deal for Hexo, stating it now gives the cannabis player more liquidity and room to grow at a time when capital, especially for cannabis companies, is extremely scarce. However, Jefferies LLP Analyst Owen Bennett said that Tilray shareholders could be scratching their heads wondering why it’s making a stronger competitor whose share of the market could be up for grabs given their precarious financial position. 

“Hexo is still independent, and it doesn't materially help in Tilray's target of 30 per cent Canada market share by 2025,” Bennett said in a note to clients on Thursday. “To this, from a Tilray shareholder value perspective, we think control has to be the end-game.”

The deal is subject to Tilray shareholder approval which Simon indicated would happen within the next 90 days.