Tilray Looks To Buy US$211 Million In Hexo Debt, Enter Strategic Alliance

In a sign that the Canadian cannabis operators continue to struggle, especially in terms of sourcing additional risk capital given the poor track record of the industry, two of the largest names in the sector are now working together under a proposed strategic alliance. Tilray Brands (TSX: TLRY) and Hexo Corp (TSX: HEXO) are reportedly looking to cut costs together as they both struggle to maintain their position in the space.

The strategic alliance appears to be borne out of the struggle currently being exhibited by Hexo Corp to find a replacement for its horrendous debt deal conducted just last year. Having evidently exhausted most avenues of further capital, they appear to have turned to one of their largest competitors within the space.

The focal point of the proposed arrangement will see Tilray Brands acquire up to US$211 million in senior secured convertible notes issued by Hexo last year to HT Investments MA LLC. Tilray has proposed purchasing the debt at 95% of the outstanding principal balance. Upon acquiring the debt, the debt will be extended by three years to May 1, 2026, providing Hexo with breathing room, while the conversion rate is set at $0.90 per share, which implies up to 37% ownership of Hexo at current rates.

Some of that debt however may continue to be redeemed by HTI until the closing of the arrangement, with Tilray setting a floor of US$182 million in debt that it would acquire. While Hexo would not receive funds from the sale, it would enable them to reduce their monthly equity issuances rather significantly. In addition to an extended maturity date, the debt would also see amendments or the elimination of certain covenants related to minimum liquidity and EBITDA targets currently attached to the debt, while the first year from closing would see interest-only payments made on the debt in the form of debt. In the remainder of the term, half of that is to be paid in cash, and the other paid in kind.

Outside of the debt acquisition, a strategic alliance between the two firms would be formed that is expected to see $50 million in cost synergies within the first two years, split equally between both Hexo and Tilray. Such synergies are expected to be found via cultivation and processing synergies, as well as through certain “Cannabis 2.0” products, as well as through shared services and procurement processes. The two firms are to also share expertise and know-how as it relates to products.

The proposed transaction remains subject to a definitive agreement being met, the completion of certain amendments to the notes, approval by exchanges, further due diligence, shareholder approval by Hexo, and Hexo securing up to $180 million in an equity line of credit.

Tilray last traded at $7.35 on the TSX.

Information for this briefing was found via Edgar and Tilray. 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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