HEXO Corp. (TSX: HEXO; NASDAQ: HEXO) (“HEXO” or the
“Company”) announces that it has entered into a definitive
arrangement agreement (the “Arrangement Agreement”) with Tilray
Brands, Inc. (“Tilray”) for a transaction whereby Tilray
will acquire all of the issued and outstanding common shares of the
Company (the “HEXO Shares”), subject to approval by the
holders of HEXO Shares (“HEXO Shareholders”) and the
satisfaction or waiver of other closing conditions (the
“Arrangement”). Under the terms of the Arrangement
Agreement, HEXO Shareholders will receive 0.4352 of a share of
Tilray common stock (“Tilray Shares”) in exchange for each
HEXO Share held (the “Exchange Ratio”), which implies a
purchase price of US$1.25 per HEXO Share based on the volume
weighted average price of Tilray Shares on the Nasdaq Stock Market
(“Nasdaq”) for the 60-day period ended on April 5, 2023.
Warrants and other convertible securities of HEXO will be adjusted
in accordance with their terms such that the holders thereof will
be entitled to receive, upon exercise or vesting thereof, Tilray
Shares, after adjustments to reflect the Arrangement and account
for the Exchange Ratio.
Concurrently with their entry into of the Arrangement Agreement,
the parties also entered into a letter agreement (the “Waiver
and Amendment Agreement”), which, among other things, provides
for a waiver by Tilray of, and the amendment to, certain covenants
under the amended and restated senior secured convertible note due
2026 issued by the Company and held by Tilray (the “Amended
Senior Secured Note”) to mitigate the risk of covenant breaches
by HEXO until the consummation of the Arrangement and to allow HEXO
to use existing cash resources to satisfy the Company’s ongoing
payment and contractual obligations and operate its business, in
consideration for the payment of cash and non-cash consideration by
HEXO to Tilray as described below.
Special Committee and Board
Approval
As Tilray is both a “related party” and an “interested party” of
the Company in accordance with Multilateral Instrument
61-101—Protection of Minority Security Holders in Special
Transactions (“MI 61-101”), HEXO’s Board of Directors (the
“Board”) formed a special committee comprised solely of
independent directors (the “Special Committee”) for the
purposes of, among other things, reviewing, evaluating and making
recommendations to the Board with respect to the Arrangement and
related matters. Following a comprehensive evaluation of the
Arrangement and the Waiver and Amendment Agreement and extensive
negotiations between the Special Committee and Tilray on price and
other terms and conditions of the Arrangement and the Waiver and
Amendment Agreement, the Special Committee unanimously recommended
that the Board approve the Arrangement Agreement and the Waiver and
Amendment Agreement.
After receiving the unanimous recommendation of the Special
Committee, the Board, with certain conflicted directors, including
the directors nominated by Tilray, having recused themselves and
abstained from voting, unanimously determined that the Arrangement
and the Waiver and Amendment Agreement are in the best interests of
HEXO and that the Arrangement is fair to the HEXO Shareholders and
it unanimously recommends that HEXO Shareholders vote in favour of
the Arrangement at the special meeting of HEXO Shareholders to be
convened and held at a future date to approve the Arrangement. The
rationale and principal reasons for the recommendations of the
Special Committee and the Board are set forth below.
Formal Valuation and Fairness
Opinion
In connection with its review of the Arrangement, the Special
Committee retained Haywood Securities Inc. (“Haywood”) to
prepare and deliver a fairness opinion and a formal valuation in
accordance with MI 61-101. On April 7 and 8, 2023, Haywood verbally
delivered its formal valuation (the “Formal Valuation”) and
fairness opinion (the “Fairness Opinion”) to the Special
Committee and the Board, respectively, which report and opinion
will subsequently be delivered in writing, to the effect that,
subject to the analysis, assumptions, qualifications and
limitations which will be set forth in the written Formal Valuation
and Fairness Opinion, as at April 9, 2023, the consideration to be
received by the HEXO Shareholders based on the Exchange Ratio is
fair, from a financial point of view.
Arrangement Details
The Arrangement is to be effected by way of a court-approved
plan of arrangement under the Business Corporations Act (Ontario).
The consummation of the Arrangement is subject to a number of
conditions customary for transactions of this nature, including,
among others: (i) the approval of at least 66⅔% of votes cast by
the HEXO Shareholders at a special meeting of HEXO Shareholders;
(ii) the approval of a simple majority of the votes cast by HEXO
Shareholders at such meeting, excluding certain related or
interested parties, whose votes may not be included in determining
minority approval of a business combination under MI 61-101; (iii)
certain regulatory approvals; (iv) court approval; and (v) the
satisfaction or waiver of other conditions precedent under the
Arrangement Agreement. The Company expects to hold the special
meeting of HEXO Shareholders (the “Meeting”) for them to
consider and vote on the Arrangement before June 22, 2023. If
approved at the Meeting, the Arrangement is expected to close
shortly thereafter, subject to regulatory approvals, approval of
the court and other customary closing conditions.
Waiver and Amendment Agreement
Pursuant to the Waiver and Amendment Agreement, Tilray has
agreed, among other things, to waive the requirement under the
Amended Senior Secured Note that HEXO achieve a positive Adjusted
EBITDA (as defined therein) for the quarter ending April 30, 2023
and for subsequent quarters, and to amend the covenant set out
under the Amended Senior Secured Note to reduce the minimum
unrestricted cash balance required to be maintained by HEXO from
US$20 million to US$4 million.
In consideration for the waivers and amendments provided under
the Waiver and Amendment Agreement, HEXO has agreed to pay, and in
certain cases accelerate the payment of, various amounts owing to
Tilray under the existing Services Agreement between HEXO and a
subsidiary of Tilray, the Amended Senior Secured Note and other
commercial agreements between the parties and to pay various
waiver, amendment and termination fees, which payments in the
aggregate total approximately US$18.5 million (the “Aggregate
Payment”), with an initial payment of approximately US$9.2
million made concurrently with entry into the Arrangement
Agreement, a second payment of US$1 million in cash or by way of
transfer of real property, to be made no later than May 1, 2023 and
a final payment of approximately US$2.2 million to be made on the
business day preceding the closing date of the Arrangement. Of the
Aggregate Payment, US$6.0 million is being paid today through the
transfer to Tilray of HEXO’s real estate properties located in Fort
Collins, Colorado, and US$1 million will be paid either in cash, if
HEXO successfully completes a sale of its Brantford, Ontario
property to a third party under an ongoing sales process, or
failing that, by way of transfer of this property to Tilray not
later than May 1, 2023. The Waiver and Amendment Agreement also
provides for the possibility of an additional cash payment of up to
US$10 million by HEXO to Tilray in consideration for the
termination of the Services Agreement between the parties, but this
additional payment would only be payable in the event HEXO
generates a sufficient amount of unrestricted cash from any asset
sales or financing of HEXO permitted by Tilray after the signature
of the Waiver and Amendment and prior to closing, and subject to
the satisfaction of certain other conditions described in the
Waiver and Amendment Agreement.
The various payments and transactions to be made and implemented
pursuant to the Waiver and Amendment Agreement, both considered
independently as well as together as a whole, constitute a “related
party transaction” under MI 61-101 separate and apart from the
Arrangement, which, absent any available exemption, would require a
formal valuation and minority approval under MI 61-101. The Special
Committee unanimously recommended, and the un-conflicted members of
the Board unanimously determined, that HEXO may rely on the
“financial hardship” exemption from the formal valuation and
minority approval requirements set out in Section 5.5 (g) and
Section 5.7(e) of MI 61-101 with respect to such transactions,
given that HEXO is in serious financial difficulty, the
transactions contemplated under the Waiver and Amendment Agreement
are designed to improve the financial position of HEXO, and the
exemption provided for in Section 5.5(f) of MI 61-101 is not
available, as the transactions contemplated under the Waiver and
Amendment Agreement are not subject to court approval under
bankruptcy or insolvency law. In addition, HEXO has one or more
independent directors who have determined that the terms and
conditions of the Waiver and Amendment Agreement are reasonable for
the Company in the circumstances and are in its best interests. The
Company did not file a material change report related to the Waiver
and Amendment Agreement more than 21 days before the expected
closing of the transactions and payments contemplated therein as
required by MI 61‐101 as the signature of the Waiver and Amendment
Agreement could only be signed concurrently with the signature of
the Arrangement Agreement, and furthermore the Company requires the
immediate benefit of the waivers and amendments provided
therein.
The Arrangement Agreement and the Waiver and Amendment Agreement
will be publicly filed by the Company under its SEDAR and EDGAR
profiles at www.sedar.com and www.sec.gov and additional
information regarding the terms and conditions of such agreements,
the background of the Arrangement and the independent valuation and
fairness opinion will be provided in the information circular for
the Meeting, which will also be filed at www.sedar.com and
www.sec.gov.
Voting and Support Agreements
Each of the Company’s independent directors, senior officers and
other senior employees have entered into voting and support
agreements to vote their HEXO Shares in favour of the Arrangement,
subject to certain customary exceptions.
Reasons for Special Committee
Recommendation
In recommending the Arrangement, the Special Committee
considered and evaluated a number of factors, including:
- The fact that there is currently substantial doubt as to the
ability of HEXO to meet its obligations as they come due and,
accordingly, the appropriateness of the use of accounting
principles applicable to a going concern, and the high likelihood
and imminence of potential breaches of the minimum liquidity and
Adjusted EBITDA covenants by HEXO in the near term absent agreeing
to the Arrangement and the Waiver and Amendment Agreement on the
terms acceptable to Tilray.
- As HEXO had reported in its Q2 2023 management’s discussion and
analysis, it had a significant working capital deficiency and
reduced cash and cash equivalents and, despite its best efforts,
the Company was unable to secure any form of public or private
equity or debt financing to alleviate its near-term liquidity
issues. HEXO had further reported in its Q2 2023 filings that it
had commenced discussions with Tilray regarding potential
amendments to and/or covenant relief under the Amended Senior
Secured Note and cautioned that there could be no assurance that
HEXO would be able obtain favourable waivers and/or covenant relief
from Tilray under the Amended Senior Secured Note or that its cost
savings initiatives would yield sufficient liquidity to meet the
minimum liquidity covenant or generate positive Adjusted EBITDA to
meet its covenant requirements and execute on its business plan.
The Special Committee determined that Tilray would simply not
provide the waivers and amendments sought by HEXO, otherwise than
on the terms of the Arrangement Agreement and the Waiver and
Amendment Agreement.
- The extensive contractual prohibitions, restrictions, covenants
and other terms of the Amended Senior Secured Note, various
constraints on HEXO’s ability to access the public capital markets,
HEXO’s level of existing secured indebtedness under the Amended
Senior Secured Note, HEXO’s currently available cash resources and
financial condition, HEXO’s future monthly payment obligations to
Tilray under various agreements, the Amended Senior Secured Note
and other contractual commitments, among other factors, make it
extremely challenging and unlikely for HEXO to be able to secure
additional funding from debt or equity markets in an amount
sufficient to finance its business and operations in order to meet
its obligations and avoid defaulting in the near term under the
Amended Senior Secured Note, unless it were to have agreed to the
Arrangement and the Waiver and Amendment Agreement on terms
acceptable to Tilray.
- The assessment that there is no viable strategic, corporate or
financing alternative available to the Company, other than a
transaction with Tilray, concluded on terms acceptable to Tilray,
that would deliver some acceptable and fair value for HEXO
Shareholders while preserving HEXO as a continuing business for the
benefit of all stakeholders. The verbal Formal Valuation reflected
Haywood’s determination that, as at the date thereof, subject to
the assumptions, limitations and qualifications to be contained in
the written Formal Valuation, the consideration to be received by
HEXO Shareholders based on the Exchange Ratio under the Arrangement
is fair, from a financial point of view.
- As a result of the Arrangement becoming effective, HEXO
Shareholders would hold Tilray Shares and would participate in any
future increase in value of Tilray Shares. The Arrangement would
accordingly provide HEXO Shareholders with exposure to Tilray’s
diversified portfolio of operating assets with its operations in
research, cultivation, and distribution across Canada, the United
States and internationally. HEXO Shareholders would thereby
continue to participate in the value realized with the development
and operation of HEXO’s assets and business within Tilray. In
addition, the market capitalization and the average trading volume
of Tilray’s shares significantly exceeds the market capitalization
and the average trading volume of HEXO Shares. If the Arrangement
is successful, HEXO Shareholders will hold Tilray Shares which,
given the greater number of shares and the diversified resource
portfolio of the combined entity, should provide HEXO Shareholders
with greater liquidity and long-term prospects of potential
accretion in their investment.
- Tilray is a leading cannabis and consumer packaged goods
company with a strong production platform supporting numerous high
profile brands, including comprehensive cannabis offerings,
hemp-based foods, and alcoholic beverages. Tilray’s management team
has extensive experience and a strong track record in
consumer-packaged goods and cannabis. If the Company becomes a
wholly-owned subsidiary of Tilray and/or the two entities are
otherwise combined, the resulting organization is expected to
result in increased economies of scale to better compete in an
increasingly competitive cannabis production industry. The
resulting organization should have an enhanced capital markets and
financial profile.
- The Exchange Ratio implies a purchase price of US$1.25 per HEXO
Share based on the volume weighted average trading price of the
Tilray shares on the NASDAQ for the 60 day period prior to April 5,
2023. In general, the Tilray Shares issuable to holders of HEXO
Shares pursuant to the Arrangement will be immediately freely
tradable in both Canada and the United States.
- In connection with the Arrangement, all the incentive and
convertible securities of the Company (collectively, the
“Company Convertible Securities”) outstanding immediately
prior to the effective date of the Arrangement will be either
preserved and adjusted such that the holders thereof will be
entitled to receive, upon exercise or vesting thereof, Tilray
Shares after adjustments to reflect the Arrangement and account for
the Exchange Ratio, or will be cashed out, in the case of DSUs and
RSUs. No holder of Company Convertible Securities will experience a
cancellation of their entitlements for no consideration under the
terms of the Arrangement.
- The Arrangement Agreement provides that, notwithstanding the
non-solicitation covenants contained therein, if the Board receives
an unsolicited acquisition proposal that did not result from a
breach of the Company’s non-solicitation covenants and that the
Board determines in good faith after consultation with its advisors
that such acquisition proposal is or could reasonably be expected
to lead to a superior proposal, HEXO may enter into discussions or
negotiations or otherwise assist the person making such acquisition
proposal, provided the requirements of the Arrangement Agreement
are met. However, because of the covenants, restrictions, and other
terms and provisions of the Amended Senior Secured Note, and for
the reasons mentioned above, the Special Committee has concluded
that (i) it is unlikely that any third party would be interested in
acquiring all of the HEXO Shares for as long as the Amended Senior
Secured Note remains outstanding, (ii) there is no viable
alternative for HEXO to the Arrangement upon the terms of the
Arrangement Agreement, and (iii) the Arrangement represents the
best alternative for, and likely the only option available to, HEXO
and HEXO Shareholders for the foreseeable future, and a superior
proposal to the Arrangement upon the terms of the Arrangement
Agreement, while permitted under the Arrangement Agreement, is
unlikely to emerge.
- HEXO Shareholders will have an opportunity to vote on the
Arrangement, which is subject to the majority of the minority
approval requirement under MI 61-101.
- The Arrangement is subject to a determination of the court that
the Arrangement is fair and reasonable, both procedurally and
substantively, to holders of securities of the Company.
Upon completion of the Arrangement, existing Tilray and HEXO
Shareholders are expected to respectively own approximately 97.0%
and 3.0% of Tilray on a pro forma basis.
About HEXO Corp.
HEXO is an award-winning licensed producer of premium products
for the global cannabis market. HEXO delivers a thoughtfully
curated portfolio of both recreational and therapeutic cannabis
products that inspire customer loyalty. HEXO’s brands include HEXO,
Redecan, Original Stash, Bake Sale and T 2.0, as well as medical
cannabis products.
HEXO’s world-class Canadian grow sites are unmatched in size,
technological advantage and yield of high-quality cannabis, driving
innovation through every step of the process. HEXO operates three
major grow sites in Ontario and Québec, including one of the
largest growth facility in North America. HEXO Corp. is a publicly
traded company under the tickers (TSX: HEXO) and (NASDAQ:HEXO).
Forward-Looking Statements
This press release contains forward-looking information and
forward-looking statements within the meaning of applicable
securities laws (“Forward-Looking Statements”).
Forward-Looking Statements relate to future events or future
performance, reflect current expectations or beliefs regarding
future events and are typically identified by words such as
“anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”,
“likely”, “may”, “plan”, “seek”, “should”, “will” and similar
expressions suggesting future outcomes or statements regarding an
outlook. These include, but are not limited to, statements with
respect to the Arrangement, including the expected timing of
closing and various steps to be completed in connection with the
Arrangement, and other statements that are not historical
facts.
Forward-Looking Statements are made based upon certain
assumptions and other important factors that, if untrue, could
cause the actual results, performance or achievements of the
Company to be materially different from future results, performance
or achievements expressed or implied by such statements. There can
be no assurance that such Forward-Looking Statements will prove to
be accurate. Such Forward-Looking Statements are based on numerous
assumptions, including assumptions regarding the ability to
complete the Arrangement on the contemplated terms, that the
conditions precedent to closing of the Arrangement can be
satisfied, and assumptions regarding present and future business
strategies, local and global economic conditions, and the
environment in which the Company operates.
Although the Company believes that the Forward-Looking
Statements in this news release are based on certain expectations
and assumptions that are current, reasonable and complete, these
statements are by their nature subject to a number of known and
unknown risks and uncertainties and other factors that could cause
actual events, results, performance and achievements to differ
materially from management’s expectations and plans as set forth in
such Forward-Looking Statements, including, without limitation, the
following factors, many of which are beyond the Company’s control
and the effects of which can be difficult to predict: (a) the
possibility that the Arrangement will not be completed on the terms
and conditions, or on the timing, currently contemplated, and that
it may not be completed at all due to a failure to obtain or
satisfy, in a timely manner or otherwise, required shareholder and
regulatory approvals and other conditions of closing necessary to
complete the Arrangement or for other reasons; (b) the possibility
of adverse reactions or changes in business relationships resulting
from the announcement or completion of the Arrangement; (c) risks
relating to the retention of key personnel during the interim
period; (d) the possibility of litigation relating to the
Arrangement; (e) risks related to the diversion of management’s
attention from the Company’s ongoing business operations; and (f)
other risks inherent to the Company’s business and/or factors
beyond its control which could have a material adverse effect on
the Company or the ability to consummate the Arrangement.
Forward-Looking Statements should not be read as guarantees of
future performance or results. Readers are cautioned not to place
undue reliance on these Forward-Looking Statements, which speak
only as of the date of this press release. Events or circumstances
could cause the Company’s actual results to differ materially from
those estimated or projected and expressed in, or implied by, these
Forward-Looking Statements. Important factors that could cause
actual results to differ from these Forward-Looking Statements are
included in the “Risk Factors” section of the Company’s Annual
Information Form, as supplemented by the “Risks and Uncertainties”
section of the Company’s Management Discussion and Analysis for the
three and six months ended January 31, 2023 (“Q2 2023
MD&A”).
Readers are further cautioned that the lists of factors
enumerated in the Risk Factors section of the Company’s Annual
Information Form and the “Risks and Uncertainties” section of the
Q2 2023 MD&A that may affect future results are not exhaustive.
Investors and others should carefully consider the foregoing
factors and other uncertainties and potential events and should not
rely on the Company’s Forward-Looking Statements to make decisions
with respect to the Company. The Company disclaims any intention or
obligation, except to the extent required by law, to update or
revise any Forward-Looking Statements as a result of new
information or future events, or for any other reason.
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version on businesswire.com: https://www.businesswire.com/news/home/20230410005360/en/
For media or investor inquiries: Hayley Suchanek, Kaiser
& Partners hayley.suchanek@kaiserpartners.com
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