Canada's Hexo Pursues Additional JV Cannabis Deals After Molson

 | Sep 06, 2018 | 5:00 PM EDT
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Hexo Corp's (HYYDF) co-founder and CEO Sebastien St-Louis said the Canadian cannabis firm is in advanced joint venture talks with other Fortune 500 companies after it inked a beverage deal with Molson Coors (TAP) last month.

Hexo is pursuing joint ventures in cosmetics, health care, candy, edibles, and vape companies, Sebastien St-Louis told Real Money.

The Gatineau, Québec-based company is in "advanced" talks with players in these categories, St. Louis said. He declined to provide specific timing or other details on any announcements.

"There's tons of interest," he said in a Sept. 4 phone interview.

Hexo is pursuing a "hub and spoke" strategy of growing through alliances, St. Louis said. The JVs effectively act as the spokes of the wheel, with Hexo offering intellectual property in the form of cannabis ingredients for a variety of business lines.

He said the company is working with major Canadian investment banks as well as U.S. Wall Street advisory firms on the JVs. He declined to provide any specific names.

In the past, Hexo has worked with DLA Piper, Eight Capital, Cormark Securities Inc., GMP Securities, Beacon Securities Ltd. as well as Canaccord Genuity on capital raising activities, according to filings.

Hexo grabbed headlines on August 1 when it unveiled a joint venture with Molson Coors to offer cannabis drinks in October 2019, when regulations allowing the sale of such products go into effect in Canada. Shortly thereafter, Constellation Brands (STZ) unveiled a pact with Canopy Growth (CGC) . The latter transaction sparked a rally in cannabis stocks in the U.S. and Canada on speculation that Diageo (DEO) would soon wade into the space as well

Hexo's St. Louis said its Molson Coors deal also leaves Hexo free to forge other alliances or even sell itself to a larger acquirer.

Under its JV with Molson Coors, Hexo will have a 42.5% share in the business. Molson Coors has warrants that if exercised would provide about $69 million in cash for a roughly 5% stake in Hexo.

In terms of the Molson JV, the company is advancing on R&D and waiting for regulators in Canada to approve human trials for new products.

Hexo continues to build out cultivation while developing a tasteless cannabis additive for a variety of products.

Hexo, which has formally renamed itself from The Hydropothecary Corp., expects to have a little more than a third of Canopy Growth's production
and sales next year based on existing contracts, St. Louis noted. Yet the company market valuation is only about 1/23 of the larger company.

"I'm not sure what the market will eventually settle in as a multiple, but right now it's clear that it's ridiculously low compared to canopy, and even to the industry average," St. Louis added.

At last check, Hexo's market cap was under $1 billion while Canopy Growth's market cap is about $14 billion

Meanwhile on Thursday, Riposte Capital, a shareholder of Hexo, said Hexo should initiate a review of strategic alternatives because the stock remains undervalued. Riposte said the company should be "conservatively" valued at about $13.70 a share but its share price remains much lower despite "enviable assets, contracts and strong balance sheet." At last check, Hexo rose 10% to about $4.93 a share. St. Louis has yet to comment on Riposte's statement.

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