Hexo Corp (TSX:HEXO) to Acquire Newstrike Brands: 3 Reasons Why It’s a Good Move

Hexo Corp (TSX:HEXO) made a big move today that it hopes will translate in lots of growth next year.

| More on:

It was announced today that Hexo Corp (TSX:HEXO) is acquiring Newstrike Brands Ltd (TSXV:HIP) for an estimated $263 million in what is going to be an all-stock deal.

Investors will recall that last year Newstrike was the third wheel in a deal between Aurora Cannabis Inc and CanniMed Therapeutics. Ultimately, Newstrike was left out in the cold after looking like it may have been involved in the acquisition. Nonetheless, it has found a partner today and it could prove to be a great combination.

Why the move is a good one for Hexo

Hexo has not been heavily involved in acquisitions the way some of its peers have been, but this will certainly help the company in a number of different ways.

The first is through capacity, as Hexo will add 470,000 square feet worth of production space once development is completed. Given the support shortages in the industry, it’s a race to add capacity and acquisitions are an easy way to accomplish that.

Second, Hexo estimates that annual synergies of $10 million can be realized with the two companies working together. Cannabis companies are facing many challenges turning a profit and Hexo has been no exception. The closer it can get to that elusive breakeven point, the more attractive the stock will be to investors.

Another big reason that this will benefit Hexo is branding. Newstrike is backed by the Tragically Hip, and the iconic band will add some high-profile names into the mix. With advertising being highly restrictive in the industry, any type of association and connection that brands can make with consumers is going to be a big advantage, especially amid all the competition.

Hexo is expecting big things from the deal and anticipating a lot of growth as a result. Hexo Corp CEO Sebastien St. Louis has high hopes. “With Newstrike, we’re adding talented employees and infrastructure to take HEXO to the next level on our journey to become one of the largest cannabis companies in the world. We’re extremely proud of our record of execution, and today are committing to achieving over $400 million in net revenue in 2020.”

To put that into perspective, in the trailing 12 months, Hexo has done just $9 million in sales. Getting to $400 million as early as 2020 would be no small feat for the company. Whether investors believe that is a realistic target is another story, however. Growth has been all the hype in cannabis, and it’s certainly playing up to that level.

Bottom line

Hexo’s stock has nearly doubled in the past 12 months leading up to this announcement, and this move certainly makes the company’s operations much stronger. Hexo already has a strategic deal in place with Molson Coors to work on beverages, and this is just the latest strategic move that the company has made to position it for success in the industry.

That said, the stock is still a very expensive one that I’d be hesitant to buy today. Hexo will have to come out with some strong results this week before it’s able to convince me that it’s a good buy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any of the stocks mentioned.

More on Cannabis Stocks

Cannabis business and marijuana industry concept as the shadow of a dollar sign on a group of leaves
Cannabis Stocks

Should You Buy Canopy Growth Stock or Green Thumb Stock Today?

Let's dive into two cannabis giants, and which one may be the better pick for long-term investors.

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Could Aurora Cannabis Stock Finally Recover by Year-End?

Down 99% from all-time highs, Aurora Cannabis stock is focused on improving profit margins and expanding sales of its medical…

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Are Pot Stocks About to Surge Again? 

With pot stocks making big moves of late, many investors are now asking whether the cannabis sector is worth investing…

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Can Pot Stocks Aurora Cannabis and Canopy Growth Bounce Back in Q4?

Down over 99% from all-time highs, Canadian pot stocks such as Aurora Cannabis and Canopy Growth remain high-risk bets.

Read more »

Worker tags plants at an industrial cannabis operation
Cannabis Stocks

Can Canopy Growth Stock Finally Recover in 2024?

Down 98% from all-time highs, Canopy Growth remains a high-risk investment in 2024 given its weak fundamentals.

Read more »

Tech Stocks

3 No-Brainer Stocks to Buy With $20 Right Now

These three stocks are easy buys for those who don't have all that much to spend, and want long-term growth…

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

Slow Burn: Is Aurora Cannabis Finally a Good Buy in June?

One of the benefits of choosing from some of the most beaten-down market segments like cannabis is that even a…

Read more »

Caution, careful
Cannabis Stocks

I Wouldn’t Touch This TSX Stock With a 60-Foot Pole

I wouldn't touch Canopy Growth Corp (TSX:WEED) stock with a 60-foot pole.

Read more »