Shares of HEXO (HEXO 8.72%) were hopping Friday morning, up 7.8% at 11:30 a.m. EDT, on news that the Canadian cannabis company will acquire Canada's largest privately owned licensed producer, Redecan, for a purchase price of 925 million Canadian dollars ($765 million), paid in cash and stock.
Upon closing of the transaction, HEXO will pay CA$400 million in cash, plus enough new HEXO stock to be worth CA$525 million to acquire Redecan.
As HEXO explains, this acquisition will give it the No. 1 market share in Canadian recreational cannabis, including leading shares in four of Canada's largest markets: the provinces of Alberta, British Columbia, Quebec, and Ontario. Investors like this because, as Redecan co-founder Will Montour explained, "We've now entered a phase where scale is key" -- and HEXO will have it.
HEXO also predicts it will enjoy "improved future financial performance and [a greater] potential to generate cash flow" after the merger, which is slated to take place in the third quarter this year.
Investors seem excited by the news, but if I were one of them, I'd be a bit more concerned over my company laying out close to CA$1 billion for just the potential to generate cash flow.