HEXO and Tilray Brands agree to form a strategic alliance between two Canadian cannabis leaders
GATINEAU, Quebec, March 03, 2022 (GLOBE NEWSWIRE) — PRESS RELEASE — HEXO Corp., a producer of cannabis products, today announced that the company has reached an important milestone in the execution of its strategic plan, The Path Forward, in finalizing a strategic partnership with Tilray Brands, Inc., which includes a new debt financing agreement.
Under the new agreement, Tilray Brands will acquire US$211 million of senior secured convertible notes that were originally issued by HEXO to HT Investments MA LLC. The new note terms 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 over the next four quarters. The new partnership also brings together the two major cannabis market leaders in Canada and is expected to generate efficiencies of up to C$50 million within two years, which will be shared equally between HEXO and Tilray Brands.
“My top priority since joining in November has been to set a very difficult record following the ratings that were previously put in place, and today, after an exhaustive search for alternatives, we are announcing the most optimal arrangement to strengthen our balance sheet, preserve shareholder value, and provide HEXO with the capital needed to execute our The Path Forward plan,” said Scott Cooper, HEXO President and CEO. “This strategic alliance will help to reduce our costs, to preserve our autonomous option and we hope to reach a final agreement shortly.”
Irwin D. Simon, President and CEO of Tilray Brands, said, “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. For us, this paves the way for meaningful future ownership in HEXO and allows us to participate in HEXO’s share price appreciation as it continues to execute on its growth initiatives. We also expect to achieve further business and production efficiency savings of up to C$50 million within two years, which would be shared equally and allow us to continue to be Canada’s leading low-cost producer. I look forward to working with HEXO’s management team and Board of Directors to increase brand awareness and shareholder value. »
“HEXO’s debt restructuring is an essential first step in enabling the company to move forward with its Path Forward strategy and begin to unlock meaningful shareholder value,” said Mark Attanasio, Chairman of the Board. administration of HEXO. “The company has suffered a crippling overhang over the past 12 months, due to punitive takeovers and discounted dilutive financings, and we needed to resolve this issue in order to make positive progress. This new agreement accomplishes that and puts HEXO firmly on the growth path.
In addition to the restructured debt, HEXO also signed an agreement with KAOS Capital and its partners to provide a C$180 million backstop to the company, to maintain HEXO’s newly strengthened balance sheet and ensure that all interest and operational costs are covered in the future. .
“Our first priority was to refinance the company’s debt,” said Adam Arviv, CEO of KAOS. “By bringing in Tilray as a strategic partner and mitigating unsustainable monthly buyouts, we have enabled HEXO to refocus its strategic plan. In order to reiterate our support and give the company the opportunity to grow and realize its immense potential, we have also put in place a substantial support commitment and in doing so, we are very confident in the new prospects of HEXO. .
Strategic justifications for the strategic alliance of the Hexo and Tilray brands
The companies believe that the strategic alliance between Hexo and Tilray Brands will bring several financial and strategic benefits, including the following:
- Operational flexibility: Purchasing the Notes would provide HEXO with immediate operational flexibility by eliminating the monthly repayment feature, changing financial covenants, and extending the maturity, among other things. The terms of the transaction unlock US$80 million of previously restricted cash which, combined with the C$180 million equity guarantee 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 generate up to C$50 million in cost synergies within two years of closing the transaction. The two companies have worked together to assess cost reduction synergies as well as other production efficiencies, including in cultivation and processing services, select Cannabis 2.0 products, including pre-rolls, beverages and edibles and shared services and supply.
- Increases product range and commitment to innovation: Leveraging both companies’ commitment to innovation, brand building and operational efficiency, the two companies will share their expertise and know-how to strengthen their market positioning and capitalize on opportunities. growth thanks to an expanded product offering and new innovations.
- Under the terms of the transaction, and subject to the negotiation of definitive documents and the satisfaction of specific conditions, Tilray Brands has agreed to acquire 100% of the remaining principal balance of US$211.3 million of the Notes, which have all originally issued by HEXO to HTI.
- In consideration for Tilray Brands’ purchase of the Notes, Tilray Brands will pay HTI 95% of the then outstanding principal amount for the Notes. Until closing, HTI may continue to repurchase the Notes in accordance with their terms, but in no event will the principal amount of Notes purchased be less than US$182 million prior to the closing of the transaction.
- Among the various modifications to be made to the Notes, the initial conversion price will be C$0.90 (subject to the adjustments set forth in the Note certificates and the Indenture governing the Notes), which, effective on the 2 March 2022, implies that Tilray Brands has the right to convert the Notes into approximately 37% of HEXO’s outstanding common stock (on a basis basis), including all equity issuances associated with the transaction at closing. The purchase price will be paid in cash, common stock of Tilray Brands or a combination of both.
- As part of the purchase of the Notes, Tilray Brands and HEXO intend to extend the maturity date by three years, to May 1, 2026, to provide HEXO with the flexibility and time needed to continue the implementation of its strategic growth “The Path Forward”. plan.
Terms of trade
The transaction is subject to a number of conditions, including (i) the completion of all required amendments to the terms of the Notes; (ii) execution of final ticket documentation; (iii) receipt of approvals from the Toronto Stock Exchange and Nasdaq Stock Market LLC, satisfactory to HEXO and Tilray Brands, as applicable; (iv) satisfactory completion by Tilray Brands of the confirmatory financial due diligence; (v) receipt of all consents and approvals required by regulatory authorities; (vi) final approval by the boards of directors of each of the HEXO and Tilray brands; (vii) the receipt of the Shareholder Approval by HEXO shareholders; (viii) no Material Adverse Effects have occurred with respect to HEXO; and (ix) the receipt of all necessary approvals relating to the C$180 million committed capital line provided by KAOS.
In addition to the restructured debt, HEXO has entered into an agreement with KAOS pursuant to which HEXO, KAOS and other parties that may be added to the Reserve Commitment are expected to negotiate a Reserve Share Purchase Agreement. It is intended that the Standby Agreement will permit HEXO to require the Standby Parties to subscribe for an aggregate of C$5 million of common stock per month over a 36-month period. The common shares are expected to be issued at a 10% discount to the 20-day volume-weighted average price of HEXO shares on the Toronto Stock Exchange (TSX) at the time the application is made. The maximum reserve commitment is expected to be C$180 million over the life of the reserve agreement. A subscription commitment fee of 5% payable in common shares will be payable upon execution of the subscription agreement. It is expected that all Common Shares issued to the Reserve Parties will be freely tradable under applicable securities laws. HEXO and the Standby Parties intend to enter into, concurrently with the Standby Agreement, a Nomination Rights Agreement on customary terms. Proceeds from the Standby Commitment are expected to be used to fund interest payments under the Notes and for general corporate purposes.
The Support Agreement remains subject to negotiation and, among other things, obtaining the necessary regulatory and TSX approvals.
In consideration of the closing of the transaction, HEXO and Tilray Brands have agreed to work together, in good faith, to evaluate cost savings synergies as well as other production efficiencies and offer to enter into definitive agreements relating to certain mutually agreed commercial transactions. These mutually beneficial business transactions are expected to include (i) cultivation and processing services, (ii) certain Cannabis 2.0 products (including pre-rolls), each with a view to achieving optimal profitability between HEXO and Tilray Brands, and (iii) establish a joint venture that will provide shared services to both companies. Total savings, which will be shared equally between HEXO and Tilray Brands, are expected to reach C$50 million within two years.
Tilray Brands and HEXO will host a conference call to discuss today’s announcement at 8:30 a.m. ET, details of which are provided below.
Call number: (877) 407-0792 from Canada and the United States or (201) 689-8263 from abroad. Please dial at least 10 minutes before the start time.
A simultaneous live webcast will be available in the Investors section of HEXO’s website at www.hexocorp.com. The webcast will also be archived.
Lazard is financial advisor and Norton Rose Fulbright Canada LLP is legal advisor to HEXO.
Canaccord Genuity Corp. is acting as financial advisor and DLA Piper (Canada) LLP is acting as legal advisor to Tilray Brands.