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Hexo, one of the largest licensed cannabis producers in Canada, is an award-winning consumer-packed cannabis goods company. Incorporated in 2013 under the name “The Hydropothecary Corporation,” the company changed its name to Hexo in 2018. It produces both adult-use and medicinal marijuana products. Zenabis is one of Canada’s largest licensed producers of medicinal and recreational cannabis. It deals in domestic distribution as well as exports. Major brands include Namaste, Re-Up, and Blazery. Products from these brands include both cannabis and its derivatives like dried flower, soft gels, oral sprays, pre-rolls, and vape cartridges. But, is Hexo Stock a Buy After Zenabis Acquisition?

Hexo acquires Zenabis for $235 million

Is Hexo Stock a Buy After Zenabis Acquisition?

On Feb 16, 2021, Hexo announced that it agreed to acquire Zenabis in a deal valued at $235 million, indicating a premium of 19%. The transaction was approved by the boards of both Hexo and Zenabis.

The major reasons behind this deal were:

  • Hexo would become one of the top three companies in Canada in terms of recreational cannabis sales. With this acquisition, Hexo got two indoor cultivation facilities and 2.1 million sq ft of greenhouse space from Zenabis, which doubles its current cultivation capacity, and will help it amp up cannabis cultivation to 112,000 kg a year.
  • Zenabis’ partner in Europe, ZenPharm based out of Malta, provides pharmaceutical products in the European market. The press release said, “The transaction gives HExo immediate access to the European medical cannabis market through Zenabis’ local partner, with an established facility in the European Union supplying pharmaceutical products to the European market. The facility also serves as a European Union Good Manufacturing Practice packaging and distribution center for medical cannabis products produced in Zenabis’ Atholville facility.”
  • Annual synergies of both companies may reach $20 million within one year.

Why is Jeffries bearish on the pot giant?

Is Hexo Stock a Buy After Zenabis Acquisition?

While this seems like a good deal on the face of it, not everyone is convinced. Jefferies analyst Owen Bennett is among the non-believers.

In a note to clients, he said, “While the near-term financial benefits of this deal are significant, we wonder whether these have clouded judgement around longer strategic benefits and value creation.” Hemp Stock Picks

Bennett says that there is limited value for Hexo with the Zenabis acqusition in Canada. He said, Hexo is “not really acquiring any brands of value,” implying that Zenabis’ brands are “value” brands, similar to Hexo’s. Bennett doesn’t see long-term value in Canada. Even on the European benefits, Bennett has his doubts.

He says Europe is already too crowded with other players who are better-positioned. He said Hexo should have looked in their own neighborhood instead of a different continent. “We think Hexo would have been much better placed looking to do something in the US….After all, it is US optionality which will be critical to maintaining current Canadian sector multiples, not Canada and Europe.”

Bottom Line: Is Hexo Stock a Buy After Zenabis Acquisition?

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Zenabis’ financials are not the best ones around. For the third quarter of 2020, ended September 30, 2020, Zenabis reported consolidated net revenue of $23.7 million, compared to $27.4 million in the prior quarter. Consolidated net loss for Q3 2020 totalled $17 million compared to $15.7 million in Q2 2020. Zenabis had debt worth $116.6 million at the end of September 2020.

Bennett has a ‘sell’ recommendation on Hexo with a price of $2.78. That’s a massive fall from Hexo’s current levels of $8.09, of almost 66%. Hexo stock was trading at $10.17 on February 15 and has already fallen since then. The average estimate for the stock by other analysts is $6.94. This might not be the best stock to invest in right now.

Is Hexo Stock a Buy After Zenabis Acquisition?

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