Hexo: Stifel-GMP Puts Bankruptcy On The Table For Company Following Terrible Debt Deal

On October 29th, Hexo Corp (TSX: HEXO) reported its fiscal fourth quarter financial results. The company reported revenues of $38.76 million, an increase of 43% quarter over quarter. The improvement was primarily due to the company acquisition of Zenabis being included in these financials as of June 1st, 2021. The company also announced that they have increased their market share of the Canadian recreational market in Ontario, Alberta, and British Colombia among others.

Multiple analysts lowered their 12-month price target after the results, bringing the average 12-month price target to C$3.76, down from C$5.51 last month. The company currently has 11 analysts covering the stock with 1 analyst having a buy rating, 7 have hold ratings, 2 have sell and 1 analyst has a strong sell rating. The street high sits at C$8 from MKM Partners while the lowest comes in at C$1.72 from Stifel-GMP.

In Stifel-GMPs note, they reiterate their hold rating while lowering their 12-month price target to C$1.72 from C$2.85, saying that the fundamental case is now obscured and the company is in a “precarious position” due to its May convertible.

For the results, Stifel-GMP says that the quarterly revenue came in higher than estimates while the C$13 million EBITDA loss came in a lot worse than expected. Because of these results, Stifel has raised their fiscal 2022/2023 estimates but lowered their profit estimates. They now expect fiscal 2023 EBITDA to be C$35 million, down from their C$65 million estimate prior.

Now onto the fun part, Stifel-GMP estimates that the company has a total of C$240 million in cash while their debt sits at C$424 million. They believe that the company has roughly $294 million or 208 million shares, of the May convertible still on their books. During the three months between May and July, the company issued 4.5 million shares/C$27.5 million. Stifel-GMP writes, “the implied redemptions through F1Q22 implies an aggressive approach by the bondholders to realize quick returns and profit on HEXO share price weakness with $180 million in potential redemptions for the remainder of the year.” Stifel-GMP seems worried since this debt is secured by the first lien on substantially all of the companies assets.

Stifel-GMP offers 8 increasing worse options for equity holders. The first would be HEXO renegotiating the convertible debt with bondholders, the next few are a variety of ways of raising cash. From issuing regular debt, equity, or getting the warrant holders to exercise their warrants via a new strike price.

The other two options are pursuing a deal with either Molson Coors or Redecan shareholders. The thought process for Molson to strike a deal comes down to if HEXO cannot honor its obligations to provide capital into the 42.5/57.5% Truss joint venture. This would incentivize Molson to take a stake in the company.

As for the Redecan shareholders, Stifel-GMP puts it as the following, “Redecan shareholders likely to endure further dilution.” Following the completion of the Redecan deal, they will have 2 board members and Stifel-GMP expects that if this were to happen a turnover of the board and current management team would happen.

The last option would be, of course, to just declare bankruptcy. “This would leave the equity holders including the Board and founders with no value but would complicate the bondholders’ ability to realize value,” Stifel says. They also believe this option to be the most complex and a hollow threat.

Information for this briefing was found via Sedar and Refinitiv. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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