What happened
Shares of Canadian cannabis company Hexo (HEXO) soared at the open Thursday after it and peer Tilray announced plans for a new strategic partnership. As of 10 a.m. ET, Hexo shares were up 11.7% while Tilray stock had sunk 3.3%.
So what
The new agreement calls for Tilray to acquire up to $211 million of senior secured convertible notes that Hexo previously issued. Tilray will be able to convert the notes to Hexo stock at a price of about $0.71 per Hexo share. Hexo shares closed yesterday at a price of $0.57 per share. In a statement, Hexo said, "The new terms of the Notes are significantly more favourable to Hexo and will enable the Company to strengthen its balance sheet and accelerate its transformation."
Image source: Getty Images.
Now what
When Hexo reported its fiscal first-quarter 2022 financial update in December 2021, it said it lost more than $90 million. But the company also announced a new strategic transformation plan it calls "The Path Forward," aimed at achieving positive cash flow over the next year.
Commenting on the new agreement, Tilray CEO Irwin Simon said his company expects its future equity ownership of Hexo will lead to gains as Hexo's share price appreciates. He added, "We also expect to realize further commercial and production efficiency savings of up to C$50 million within two years, which would be shared equally and would allow us to continue being the leading, low-cost Canadian producer."
Hexo shares have plummeted more than 90% in the last 12 months. But like Hexo management, Tilray's Simon believes Hexo's growth initiatives will help the company, and the stock, turn around in the future. Investors today seem to think it provides a floor for Hexo stock, but they don't appear to share Simon's optimism on the benefits for Tilray.
