HEXO Deal Could Be A Big Win For Tilray, This Analyst…

HEXO Deal Could Be A Big Win For Tilray, This Analyst Tells Us Why

On Wednesday HEXO Corp (NASDAQ:HEXO) reported a staggering loss of CA$152.7 million ($118 million) in the third quarter of 2022, representing a 638% year-over-year increase.

Gross profit was a loss of CA$5.27 million compared to a gain of CA$8.82 in the same quarter of 2021, while sales of CA$45.6 million were also down, 14% sequentially.

The company ended the quarter with a financial net debt of CA$166 million, according to the earnings report which came on the heels of announced amendments to the agreement with Tilray Brands (NASDAQ:TLRY), initially revealed in March.

The Canadian cannabis giant entered into a strategic partnership with HEXO - a debt financing agreement - under which it agreed to acquire $211 million of senior secured convertible notes that were originally issued by HEXO to HT Investments MA LLC. In April, Tilray signed a definitive agreement to purchase 100% of the remaining US$193 million outstanding principal balance of the senior secured convertible note.

“The agreement with HEXO delivers on both fronts as it facilitates collaboration, the sharing of best practices, and yields quantifiable operating efficiencies between two companies with unparalleled global cannabis expertise,” Irwin D. Simon, Tilray Brands’ chairman and CEO, said back then.

Earlier this week, that deal was amended to address current stock market conditions and to reduce closing risk. Separately, the company has entered into an amending agreement to the equity purchase agreement with 2692106 Ontario Inc. and KAOS Capital Ltd, which was approved by HEXO shareholders on Thursday.

Cantor Fitzgerald’s analyst Pablo Zuanic said in his recent note that the amendments suggest that Tilray would buy the outstanding convertible debt, which currently amounts to $185 million, at a 10.8% discount.

“The agreement with Tilray in essence extends the maturity of the convertible debt and halts future redemptions,” the analyst explained.

The Analyst

Zuanic retained a neutral rating on HEXO’s stock while lowering the price target to CA$0.35 from CA$0.75 on reduced sales estimates, higher share count and sectoral derating.

The Thesis

HEXO is currently valued at $100 in market cap, which according to Zuanic is a low valuation, attributing it to high debt, negative earnings and cash flow, as well as continued shareholder dilution risk.

Still, he said that Tilray could benefit from “HEXO’s travails.”

He emphasized that Tilray could leverage the current state of the markets and crisis which HECO is facing to negotiate the terms, spend less cash and eventually covert the debt in a 50% equity stake in the Canadian company, instead of 37%, according to the initial agreement.

“This all looks rather attractive for Tilray (it will pay HT Inv with US$50Mn in a convertible note due 9/1/23 and the balance either in cash or stock), as it could take 50% control of a company(HEXO) with a larger scale in the Canadian rec market (as per Hifyre) while making use of its own market cap of US$1.6Bn (vs. HEXO at US$94Mn,” Zuanic said.