HEXO Corp. ("HEXO") (TSX: HEXO; NYSE: HEXO) and Zenabis Global Inc.
("Zenabis") (TSX: ZENA) are pleased to announce that they have
entered into a definitive arrangement agreement (the "Arrangement
Agreement") under which HEXO will acquire, by way of court-approved
plan of arrangement under the Business Corporations Act (British
Columbia), all of Zenabis’ issued and outstanding common shares in
an all-share transaction valued at approximately $235 million
(the "Transaction"). Under the terms of the Arrangement Agreement,
Zenabis shareholders will receive 0.01772 of a HEXO common share in
exchange for each Zenabis common share held (the “Exchange Ratio”).
The Exchange Ratio implies a premium per Zenabis common share of
approximately 19% based on the 20-day volume-weighted average price
("VWAP") of Zenabis common shares on TSX and HEXO common shares on
TSX as of February 12, 2021. Warrants and incentive securities of
Zenabis will be adjusted in accordance with their terms to
ultimately become exercisable to receive common shares of HEXO
based on the share exchange ratio.
The Transaction was unanimously approved by the
board of directors of each of HEXO and Zenabis (in the case of
Zenabis’ board of directors, after receiving the unanimous
recommendation of a special committee formed for purposes of the
Transaction), and Zenabis’ board of directors unanimously
recommends that its shareholders vote in favour of the
Transaction.
Transaction Highlights
- Strengthened domestic
brands: Based on HEXO’s and Zenabis’ most recent interim
quarterly financial statements and results, and those of the other
top licensed producers in Canada, the combined organization would
be a top three licensed producer in terms of combined Canadian
recreational cannabis sales.
- Foothold in
Europe: 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 centre for medical cannabis products produced in
Zenabis' Atholville Facility.
- Accretive
synergies: HEXO estimates that the combined entity may
realize annual synergies of approximately $20 million within one
year of close, through cost of goods reductions, additional
capacity utilization in HEXO’s Belleville Centre of Excellence and
selling, general and administrative savings, which, if realized,
should allow HEXO to continue its path towards positive
earnings.
- Capacity boost with
state-of-the-art cultivation infrastructure: The proposed
Transaction would give HEXO access to licensed capacity to produce
approximately 111,200 kg of additional high-quality cannabis
annually. The Transaction would result in HEXO acquiring two indoor
facilities (approximately 635,000 sq. ft.) and access to a 2.1
million sq. ft. greenhouse facility, totalling approximately 2.735
million sq. ft. of near-term cultivation space offering diversified
growing and production techniques. This provides a platform for
growth and foundation from which to strengthen and diversify our
portfolio of brands.
“We're thrilled to welcome the Zenabis team into
the HEXO family. Zenabis has built solid relationships and they
share HEXO’s vision of bringing exceptional branded cannabis
experiences to adults everywhere, in Canada and abroad” said
Sebastien St-Louis, CEO and co-founder of HEXO Corp. “We are
proceeding with this transaction because we believe it should be
accretive for our shareholders, and it also positions HEXO for
accelerated domestic and international growth while supporting
near-term requirements for additional licensed capacity. HEXO’s
growth strategy includes expanding our global presence, and this
acquisition is an important step in that direction.”
“This is a compelling combination. Our brands
and strains strength across Canada, coupled with our international
footprint and state of the art low cost and high quality
cultivation facilities complements HEXO’s business, creating an
industry leader. Like HEXO, Zenabis believes that the combination
should deliver meaningful synergies, a stronger financial position
with increased flexibility, and should position the combined
company to meet growing consumer demand on a national and
international basis. I believe this transaction is beneficial to
our shareholders, customers, partners, and employees. We look
forward to working closely with HEXO to complete this transaction,"
added Shai Altman, CEO of Zenabis.
Additional Transaction
Details
The Transaction will require approval by at
least 66 2/3% of the votes cast by the shareholders of Zenabis
present at a special meeting of Zenabis shareholders. HEXO has
entered into voting support agreements with Zenabis’ directors and
officers with respect to all Zenabis shares owned by them.
The Arrangement Agreement includes customary
provisions, including non-solicitation provisions, subject to the
right of Zenabis to accept a superior proposal in certain
circumstances, with HEXO having a period of five business days to
exercise a right to match any such superior proposal for Zenabis.
The Arrangement Agreement also provides for a termination fee of
$6.0 million payable by Zenabis to HEXO if the Transaction is
terminated in certain specified circumstances, as well as
reciprocal expense reimbursement fees if the Transaction is
terminated by either party in certain other specified
circumstances.
In addition to the approval by Zenabis’
shareholders, the Transaction is subject to the receipt of certain
regulatory, court and stock exchange approvals and the satisfaction
of customary conditions precedent in transactions of this nature as
well as the satisfaction of the following additional conditions
precedent: (i) the termination and unconditional release of the
guarantee provided by Zenabis in favour of Bank of Montreal in
connection with the disposition of Bevo Farms Ltd. and its
subsidiaries (“Bevo”) announced by Zenabis on January 4, 2021; (ii)
the completion of the Bevo sale transaction; and (iii) certain
other specified conditions precedent set out in the Arrangement
Agreement.
Upon completion of the Transaction, existing
HEXO and Zenabis shareholders would respectively own approximately
87.43% and 12.57% of HEXO on a pro forma fully-diluted basis. In
addition, HEXO has undertaken in the Arrangement Agreement, within
90 days of closing of the Transaction, to increase the size of its
board of directors by one director and cause one of the current
directors of Zenabis, selected by HEXO, to be appointed to HEXO’s
board of directors in accordance with HEXO’s constating
documents.
Zenabis further announces today that its
wholly-owned subsidiary Zenabis Ltd. has entered into a Settlement
Agreement and Release with a customer (the “Settlement Agreement”),
pursuant to which the parties have agreed to withdraw from the
arbitration proceedings between the parties, and release the other
party from all past, present and future claims of the parties
arising out of the pre-paid supply agreement relating to subsequent
deliveries of cannabis product.
Contemporaneously with the signature of the
Arrangement Agreement, Zenabis has entered into an agreement with
HEXO for the issuance of an unsecured convertible debenture to HEXO
in a principal amount of $19.5 million, evidencing both a cash
advance extended by HEXO to Zenabis at the end of 2020 as well as a
further advance extended to Zenabis contemporaneously with the
announcement of the Transaction for the purpose of allowing Zenabis
to pay the settlement amount pursuant to the Settlement Agreement.
The unsecured convertible debenture bears interest at a rate of 8%
per annum and matures on February 15, 2023. The debenture is
convertible, in whole or in part, at any time after the earlier of
the termination of the Arrangement Agreement and the then
applicable “Outside Date” thereunder, at the option of HEXO, into
common shares of Zenabis at a conversion price equal to the 5-day
VWAP of the common shares on TSX for the five trading days prior to
the date of conversion. The debenture may be prepaid by Zenabis, at
its option and without penalty or premium, at any time after the
earlier of the termination of the Arrangement Agreement and the
then applicable “Outside Date” thereunder, subject to HEXO’s right
to elect to convert the debenture into Zenabis common shares prior
to the prepayment. A change of control of Zenabis, other than the
Transaction with HEXO, shall result in the mandatory conversion of
the debenture into common shares of Zenabis at a conversion price
equal to the 5-day VWAP where the last day of the 5-day VWAP of the
common shares on TSX shall be the trading day immediately preceding
the trading day on which the first of any such change of control
transactions is initially publicly announced whether by Zenabis or
by the person proposing, intending or agreeing to effect the change
of control transaction. The unsecured convertible debenture also
contains a provision that prevents HEXO from acquiring, at any
given time as a result of and upon conversion of the debenture
(other than in respect of a mandatory conversion in the context of
a change of control transaction), more than 9.9% of Zenabis’ common
shares. The listing of the Zenabis common shares issuable pursuant
to the subscription is subject to the acceptance by the Toronto
Stock Exchange.
Further information regarding the Transaction
including the key terms and conditions of the unsecured convertible
debenture issued to HEXO will be included in the information
circular that Zenabis will prepare, file, and mail in due course to
its shareholders in connection with its special meeting to be held
to consider the Transaction. Zenabis will be applying in the coming
weeks to the British Columbia Supreme Court to obtain an interim
order approving various procedural and related matters in order to
convene the special meeting of shareholders in connection with the
Transaction. The Arrangement Agreement will be filed under the
SEDAR profiles of Zenabis and HEXO on the SEDAR website at
www.sedar.com.
None of the securities to be issued pursuant to
the Arrangement Agreement have been or will be registered under the
United States Securities Act of 1933, as amended (the "U.S.
Securities Act"), or any state securities laws, and any securities
issued in the Arrangement are anticipated to be issued in reliance
upon the exemption from such registration requirements provided by
Section 3(a)(10) of the U.S. Securities Act and applicable
exemptions under state securities laws. This news release does not
constitute an offer to sell or the solicitation of an offer to buy
any securities.
Recommendation of Zenabis’
Board
The Transaction has been unanimously recommended
to the Zenabis board of directors by a special committee, comprised
of independent directors Daniel Burns and Natascha Kiernan, which
was formed to investigate strategic alternatives and to
renegotiate and restructure the Company’s capital. After receiving
the recommendation of the special committee and receiving
independent financial and legal advice, Zenabis’ board of
directors has unanimously determined that the Transaction is
in the best interests of Zenabis and its security holders, and the
board of directors unanimously recommends that Zenabis’
shareholders vote in favour of the Transaction.
The board of directors of Zenabis has obtained a
fairness opinion from Echelon Wealth Partners Inc. to the
effect that, as of the date of the Arrangement Agreement, and
subject to the assumptions, limitations, and qualifications on
which such opinion is based, the consideration to be received
pursuant to the Transaction is fair, from a financial point of
view, to the Zenabis shareholders.
Advisors and Counsel
Echelon Capital Markets (a member of Echelon
Wealth Partners Inc.) is acting as financial advisor to Zenabis in
connection with the Transaction. Stikeman Elliott LLP is acting as
legal counsel to Zenabis and to the special committee of the board
of directors of Zenabis.
A.G.P./Alliance Global Partners is acting as
financial advisor to HEXO and Norton Rose Fulbright Canada LLP is
acting as legal counsel to HEXO.
About HEXO Corp
HEXO Corp is an award-winning consumer packaged
goods cannabis company that creates and distributes innovative
products to serve the global cannabis market. The Company serves
the Canadian adult-use markets under its HEXO Cannabis, Up Cannabis
and Original Stash brands, and the medical market under HEXO
medical cannabis. For more information please visit
hexocorp.com
About Zenabis
Zenabis Global Inc. is a significant Canadian
licensed cultivator of medical and recreational cannabis. Zenabis
employs staff coast-to-coast, across facilities in Atholville, New
Brunswick; Langley, British Columbia; and Stellarton, Nova Scotia.
Zenabis currently has 111,200 kg of licensed cannabis cultivation
space across three licensed facilities in Canada, together with its
cannabis import, export and processing joint venture, ZenPharm,
operating from Birżebbuġa, Malta.
CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS:
Certain information in this news release
constitutes forward-looking statements under applicable securities
laws. Any statements that are contained in this news release that
are not statements of historical fact are forward-looking
statements. Forward looking statements are often identified by
terms such as "may", "should", "anticipate", "expect", "potential",
"believe", "intend", “estimate” or the negative of these terms and
similar expressions. Forward-looking statements in this news
release include, but are not limited to: statements with respect to
the completion of the Transaction and the timing for its
completion; the satisfaction of closing conditions which include,
without limitation (i) required Zenabis shareholder approval, (ii)
necessary court approval in connection with the plan of
arrangement, (iii) receipt of any required approvals under the
Competition Act, (iv) certain termination rights available to the
parties under the Arrangement Agreement, (v) HEXO obtaining the
necessary approvals from the TSX and the NYSE for the listing of
its common shares in connection with the Transaction (vi). Zenabis
receiving approval for the delisting of its shares on the TSX and
(vii) other closing conditions, including compliance by HEXO and
Zenabis with various covenants contained in the Arrangement
Agreement; statements with respect to the effect of the Transaction
on HEXO and its strategy going forward and statements with respect
to the anticipated benefits associated with the acquisition of
Zenabis.
Forward-looking statements are based on certain
assumptions regarding HEXO and Zenabis, including the completion of
the Transaction, anticipated benefits from the Transaction, and
expected growth, results of operations, performance, industry
trends and growth opportunities. While HEXO and Zenabis consider
these assumptions to be reasonable, based on information currently
available, they may prove to be incorrect. Readers are cautioned
not to place undue reliance on forward-looking statements.
The assumptions of HEXO and Zenabis, although
considered reasonable by them at the time of preparation, may prove
to be incorrect. In addition, forward-looking statements
necessarily involve known and unknown risks, including, without
limitation, risks associated with general economic conditions;
adverse industry events; future legislative, tax and regulatory
developments; inability to access sufficient capital from internal
and external sources, and/or inability to access sufficient capital
on favourable terms; the ability of HEXO to implement its business
strategies; competition; currency and interest rate fluctuations
and other risks. Among other things, there can be no assurance that
the Transaction will be completed or that the anticipated benefits
from the Transaction will be achieved.
Readers are cautioned that the foregoing list is
not exhaustive. Readers are further cautioned not to place undue
reliance on forward-looking statements as there can be no assurance
that the plans, intentions or expectations upon which they are
placed will occur. Such information, although considered reasonable
by management at the time of preparation, may prove to be incorrect
and actual results may differ materially from those anticipated.
For more information on the risk, uncertainties and assumptions
that could cause anticipated opportunities and actual results to
differ materially, please refer to the public filings of HEXO and
Zenabis which are available on SEDAR at www.sedar.com, including
the “Risk Factors” section in HEXO’s Annual Information Form dated
October 29, 2020, Zenabis’ Annual Information Form dated March 30,
2020 and the most recent management’s discussion and analysis filed
by each of HEXO and Zenabis.
Forward-looking statements contained in this
news release are expressly qualified by this cautionary statement
and reflect our expectations as of the date hereof, and thus are
subject to change thereafter. HEXO and Zenabis disclaim any
intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future events
or otherwise, except as required by law.
Notice to U.S. Holders. Both
HEXO and Zenabis have been formed outside of the United States. The
Transaction will be subject to disclosure requirements of Canada
that are different from those of the United States. Financial
statements included in the documents, if any, will be prepared in
accordance with Canadian accounting standards and may not be
comparable to the financial statements of United States companies.
It may be difficult for a securityholder in the United States to
enforce his/her/its rights and any claim a securityholder may have
arising under U.S. federal securities laws, since the companies are
located in Canada, and some or all of their officers or directors
may be residents of Canada or another country outside of the United
States. A securityholder may not be able to sue a Canadian company
or its officers or directors in a court in Canada or elsewhere
outside of the United States for violations of U.S. securities
laws. It may be difficult to compel a Canadian company and its
affiliates to subject themselves to a U.S. court's judgment.
Neither the TSX,nor NYSE accepts responsibility
for the adequacy or accuracy of this release.
For further information, please
contact:
HEXO
Investor
Relations:invest@HEXO.comwww.hexocorp.com
Media Relations:(819)
317-0526media@hexo.com
Zenabis
Media Relations Email:
media@zenabis.com Phone: 1-855-936-2247
Investor Relations E-mail:
invest@zenabis.com Phone: 1-855-936-2247
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