In case you haven't noticed, big things are happening in the marijuana industry. Long considered a taboo industry that wasn't worth the time of day of lawmakers or investors, few if any industries have grown faster, or delivered greater returns for investors over the last three years, than legal marijuana.
With Canada becoming the first industrialized country in the world to legalize adult-use weed, the first step in the industry's maturation process was to greatly expand production capacity -- a task that is still ongoing. While a handful of growers have completed their greenhouse build-outs, quite a many are still finishing up construction and/or waiting in a very long line for Health Canada to approve their grow farms for harvest and sale.
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The next step in the maturation process for pot stocks is dealmaking, whether that be from the standpoint of consolidation, signing supply or delivery agreements, or partnering up with other companies or industries.
Quietly, one marijuana stock has landed itself four arguably game-changing deals in what amounts to just a hair over one year's time. Ladies and gentlemen, it's time to take a step back and marvel at HEXO (HEXO).
1. HEXO signs the largest provincial supply agreement in history
HEXO, which was known as "Hydropothecary" at this time last year (Hydropothecary is HEXO's leading medical cannabis brand), really had its coming-out party in April 2018, which is when it announced the largest provincial supply deal in history.
Based in Quebec, HEXO, which was on track for 108,000 kilos of peak annual output, according to management, announced that it would supply Quebec with an aggregate of 200,000 kilos over a five-year period, with Quebec retaining the right for a sixth-year option. With incrementally more cannabis expected to be supplied with each passing year, the deal worked out to about 40% of HEXO's projected production through the end of 2023. This deal effectively made HEXO the most de-risked of all major marijuana producers, because a good portion of its annual output would be spoken for over the next half decade.
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2. HEXO becomes the first grower to land a brand-name infused-beverage partnership
On Aug. 1, HEXO made history again by becoming the first major pot producer to partner with a brand-name beverage company with the explicit purpose of developing and manufacturing cannabis-infused beverages. Note, Modelo and Corona beer maker Constellation Brands did make a $190 million investment into Canopy Growth back in October 2017, but no specifics were laid out with regard to beverage development.
The deal in early August partnered HEXO with Molson Coors Brewing (TAP -2.37%) in a 57.5%-42.5% joint venture known as Truss (Molson Coors has the majority ownership). Molson Coors has faced declining beer market share in Canada over the past decade, and is looking for a means to reignite revenue growth. With Health Canada expected to approve a slew of derivative products by this coming October, Molson Coors and HEXO are aiming to be among the first big-brand cannabis-infused beverage makers to hit dispensary store shelves.
3. HEXO announces the acquisition of Newstrike Brands
In mid-March 2019, HEXO announced the all-stock acquisition of Newstrike Brands for what amounts to about $197 million. Under the terms of the agreement, Newstrike shareholders will receive 0.06332 shares of HEXO for each share of Newstrike. In return, HEXO receives a big boost in capacity and a substantial top-line bump.
Prior to announcing this deal, HEXO had 1.31 million square feet of grow space. However, Newstrike adds another 470,000 square feet of licensed indoor space, bringing HEXO's total square footage devoted to growing to almost 1.8 million, and boosting its peak output from an estimated 108,000 kilos a year to approximately 150,000 kilos. This will slide HEXO in as Canada's sixth-largest grower by peak annual production.
Further, HEXO is privy to the provincial deals Newstrike already had in place, and should recognize annual cost synergies of up to 10 million Canadian dollars (CA$10 million). All told, management believes the combination should yield CA$400 million in net revenue (CA$479 million gross revenue, before excise tax) by 2020.
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4. HEXO teams up with Valens GroWorks on a significant extraction deal
Last, but not least, just a year and two weeks after signing its game-changing supply deal with Quebec, HEXO announced it and Valens GroWorks (VLNS) had come to a two-year extraction agreement with regard to cannabis and hemp.
Under the terms of the deal, HEXO will provide Valens GroWorks with a minimum of 30,000 kilos of cannabis and hemp biomass in the first year, and 50,000 kilos in the second year, which Valens will process on a fee-for-service basis into resins and distillates. As noted, derivative products are expected to get the green light from Health Canada very soon, and alternative cannabis consumption options tend to have significantly higher margins than dried cannabis flower. This means that paying Valens GroWorks for extraction to create higher-priced and higher-margin products for HEXO should still be a clear net-positive for the company.
Valens notes that it expects to receive and begin processing cannabis and hemp biomass early in the third quarter for HEXO.
Is HEXO on your radar? If not, it should be!
Although it's a marijuana stock that's largely slid under the radar for Wall Street and most investors, HEXO appears built for success. Assuming management's CA$479 million gross revenue estimate is accurate, sales for the company will jump from less than CA$5 million in 2018 to CA$479 million by 2020, with HEXO firmly pushing into recurring profitability next year.
Perhaps the biggest question mark going forward is just how big of a difference its partnership will Molson Coors will have on its bottom line. There's no denying that infused beverages will be a hot commodity once they hit dispensary shelves in Canada, but competition among beverage makers will likely be fierce.
Nevertheless, if HEXO hasn't been on your radar up until this point, its dealmaking ability alone should ensure that it finds its way to your watch list.
