Hexo Corp’s shares soared more than 22.2% on Feb. 16 as the cannabis company announced the acquisition of Zenabis Global in an all-stock deal valued at C$235 million.
According to the terms of the transaction, Zenabis shareholders will receive 0.01772 of Hexo shares in exchange for each Zenabis share. Shares of Zenabis Global (ZBISF) closed 18.3% higher on Feb. 16. The stock exchange ratio for the transaction implies a premium of 19% based on a 20-day volume-weighted average price of Zenabis shares and Hexo shares on the Toronto Stock Exchange (TSX) as on Feb. 12.
Hexo’s (HEXO) CEO Sebastien St-Louis said, “Zenabis has built solid relationships and they share HEXO’s vision of bringing exceptional branded cannabis experiences to adults everywhere, in Canada and abroad.”
St-Louis added, “We are proceeding with this transaction because we believe it should be accretive for our shareholders, and it also positions HEXO for accelerated domestic and international growth while supporting near-term requirements for additional licensed capacity. HEXO’s growth strategy includes expanding our global presence, and this acquisition is an important step in that direction.”
Hexo expects the combined company to be among the top three licensed producers when it comes to recreational cannabis sales in Canada. The acquisition will also give Hexo immediate access to the European medical cannabis market. Hexo expects to generate annual synergies of C$20 million within one year following of the closure of the acquisition. (See Hexo Corp stock analysis on TipRanks)
Following the deal announcement, Oppenheimer analyst Rupesh Parikh assigned a Hold rating on the stock. Parikh said, “For some time we have called for consolidation in the Canadian cannabis space. Key highlights of the transaction include: 1) stronger domestic market share; 2) a foothold in Europe; 3) accretive synergies; and 4) a capacity boost to help HEXO sustain growth rates.”
“At this point we are making no changes to our estimates (awaiting deal close). HEXO management has been executing quite well lately, in our view, and we continue to monitor the company’s progress in driving toward profitability,” the analyst added.
The rest of the Street is sidelined on the stock with a Hold consensus rating. That’s based on 1 analyst recommending a Buy, 5 analysts suggesting a Hold, and 1 analyst a Sell. The average analyst price target of $3 implies 67.1% downside potential to current levels.
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