HEXO Corp. (TSX:HEXO) (NASDAQ:HEXO) is finalizing a strategic partnership with Tilray Brands, Inc. (NASDAQ:TLRY) which includes a new debt financing agreement. Under the new agreement, Tilray Brands will acquire $211 million of senior secured convertible notes that were originally issued by HEXO to HT Investments MA LLC.
The new terms of the notes are significantly more favorable to HEXO and will enable the company to strengthen its balance sheet and accelerate its transformation into a cash flow positive business within the next four quarters. The new partnership also brings together Canada’s top two cannabis market share leaders and is expected to create efficiencies of up to CA$50 million ($39.57 million) within two years which will be shared equally between HEXO and Tilray Brands.
“My top priority since I joined in November has been to fix a very challenged balance sheet as a result of the Notes that were previously put in place, and today, after an exhaustive search for alternatives, we are announcing the most optimal agreement to strengthen our balance sheet, preserve value for shareholders and provide HEXO with the capital to execute on our The Path Forward plan,” Scott Cooper, HEXO president & CEO stated. “This strategic alliance will help lower our costs, preserves our stand-alone optionality and we look forward to reaching a definitive agreement shortly.”
Irwin D. Simon, Tilray Brands’ chairman and CEO, commented, “We believe the proposed transaction is a win-win for Tilray Brands and HEXO as it would launch a strategic partnership between two leading Canadian cannabis producers with complementary brand portfolios."
Strategic Rationales For Hexo And Tilray Brands Strategic Alliance
- Operational flexibility: The purchase of the notes would provide HEXO with immediate operational flexibility by eliminating the monthly redemption feature, amending the financial covenants and extending the maturity, among other things. The terms of the transaction unlock $80 million of previously-restricted cash which, when combined with the CA$180 million equity backstop commitment, provides HEXO with significant liquidity to invest in organic growth.
- Substantial synergies: Tilray Brands and HEXO have entered into an agreement to form a strategic partnership, which is expected to deliver up to CA$50 million of cost synergies within two years of the completion of the transaction. Both companies have been working together to evaluate cost saving synergies as well as other production efficiencies, including with respect to cultivation and processing services, certain Cannabis 2.0 products, including pre-rolls, beverages and edibles and shared services and procurement.
- Increases product breadth and commitment to innovation.
Transaction Highlights
The transaction is subject to a number of conditions.
As consideration for Tilray Brands’ purchase of the notes, Tilray Brands will pay HTI 95% of the then current outstanding principal for the notes. Until closing, HTI may continue to redeem the notes pursuant to their terms, however in no event shall the principal of the purchased notes be less than $182 million prior to the closing of the transaction.
In connection with the purchase of the Notes, Tilray Brands and HEXO intend to extend the maturity date by three years, to May 1, 2026, in order to provide HEXO with the flexibility and time to continue implementing its strategic “The Path Forward” growth plan.
Standby Commitment
In addition to the restructured debt, HEXO has entered into an agreement with KAOS pursuant to which HEXO, KAOS and such other parties that may be added to the standby commitment are expected to negotiate a standby equity purchase agreement. It is expected that the standby agreement will permit HEXO to demand the standby parties to subscribe for an aggregate of CA$5 million of common shares per month over a period of 36 months.
