Tilray Completes Hexo Acquisition; Combined Business Enables ‘Full Leverage’

Canadian cannabis company Hexo Corp, a former partner of Molson Coors, has been acquired by Tilray Brands, in a deal valued at around $250 million, the company announced yesterday in its Q3 earnings report.

The move, expected to close in June, consolidates Tilray’s position as the largest Canadian cannabis producer by market share. The company has been allied with Hexo since taking on $211 million in debt last year, including $173 million in convertible debt from HT Investments.

After exercising that convertible note, Tilray plans to acquire Hexo for $56 million in an all-stock transaction, according to a press release.

“We view this transaction as building on strength in that it takes the proven value proposition of the successful strategic partnership that we forged with the Hexo team last year,” said Irwin Simon, Tilray’s chairman and CEO, on an earnings call Monday. “And this enables us to fully leverage the combined power of our businesses. Together we have the assets and the operating expertise to build a stronger Canadian platform that takes advantage of clear opportunities to deliver stronger top line growth and increase our market share.”

Upon completion of the deal, Simon said Tilray intends to achieve additional cost savings of over $25 million annually.

Tilray, the world’s largest cannabis producer since its 2020 merger with Aphria, has actively pursued M&A opportunities across food and beverage in recent years while awaiting federal legalization of cannabis in the U.S. The company acquired craft breweries SweetWater, Green Flash, Alpine, and Montauk Brewing Co., hemp-based food brand Manitoba Harvest, as well as Breckenridge Distillery. A partnership with Anheuser-Busch InBev to research THC and CBD infused drinks ended in 2022.

Meanwhile, Hexo launched a similar joint venture with Molson Coors in 2018, establishing a U.S. production base in Fort Collins, Colorado, in June 2021. Its first release, a three-SKU line of sparkling waters featuring 20mg CBD per 12 oz. can, was released that same year in Colorado, and then expanded to 16 states. The partnership ended last November.

Much of Tilray’s growth strategy has focused on positioning the brand to take a leading role in U.S. cannabis CPG upon its federal legalization.

“When federal cannabis legalization does occur, we will leverage these U.S. businesses into beverage alcohol and wellness, including their distribution and marketing networks to capture new expansive opportunities across the U.S. and throughout the creation of a broad set of cannabis infused CPG brands.”

Tilray’s Q3 results missed analysts’ projections, reporting a net loss of $1.2 billion after posting a $52.5 million profit during the same period last year. Net sales of $145 million, a year-over-year decrease from $151.9 million.

Bev-Alc Division Revenue +5.3% in Q3, Margin -6%

For the three months ending February 28, Tilray’s net revenue from its beverage-alcohol business was $20.64 million, up from $19.597 million in the same quarter last year. Bev-alc net revenue reached $62.689 million in the nine months ending February 28, up from $48.765 million in the same period last year.

The bev-alc business’ adjusted gross margin for the quarter was 53%, down from 59% in the same quarter last year.

SweetWater, the largest craft beer brand in Tilray’s portfolio, is now distributed in 44 states, Simon said. At the time of its acquisition in late 2020, SweetWater was available in 27 states. Since then, Tilray has acquired the former Red Truck Brewing facility in Fort Collins, Colorado, to give SweetWater a production hub in the western half of the country.

As SweetWater pushes its way to a national footprint, Tilray “vastly expanded distribution” of Green Flash and Alpine, which it acquired in late 2021, through partnering with the Reyes Beverage Group, Simon said.

“We are confident by their position for ongrowing growth,” he added.

In addition, Alpine recently opened a branded taproom at Petco Park Stadium in time for the San Diego Padres’ 2023 season.

New York-based Montauk Brewing, which Tilray acquired last fall, grew its presence in New York and New Jersey and expanded into Connecticut and Rhode Island. The brand, which Simon called the No. 1 craft beer in New York, increased distribution by +10% and is now available in 3,500 retail locations.

“We are confident that Montauk Brewing has the potential to grow into a true national brand, which we’ll accomplish by leveraging SweetWater’s infrastructure to significantly expand Montauk Brewing, including entering into markets outside of its existing footprint,” Simon said.

Year-to-date through March 26, dollar sales of the SweetWater portfolio have declined -9.8% at off-premise multi outlet grocery and convenience stores tracked by market research firm Circana (formerly IRI). Volume, measured in case sales, has declined -13.4%, compared to the same period last year.