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Why HEXO Shares Took a Tumble on Thursday

By Eric Volkman – Aug 19, 2021 at 6:22PM

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The company embarks on yet another round of capital raising.

What happened

On Thursday, Canadian marijuana company HEXO (HEXO -1.19%) announced yet another flotation of new securities to bolster its finances. The company's stock price soon went in the expected direction -- down, that is, by nearly 6% on the day.

So what

In Thursday's pronouncement, HEXO said that it would issue equity "units" to investors. This is a common instrument of capital-seeking marijuana companies. Usually, one unit is a package comprising the company's stock and a warrant thrown in as a sweetener.

Marijuana flower on Canadian currency.

Image source: Getty Images.

HEXO didn't reveal the timing of the issue. It also didn't divulge the pricing of these units, saying only that they will "be priced in the context of the market," without elaboration.

The net proceeds of the issue are to be utilized to pay the cash component of Canadian dried cannabis-flower specialist Redecan, for which HEXO agreed to fork over 925 million Canadian dollars ($732 million) in May. Of the purchase price, CA$400 million ($317 million) will be paid in cash, with the remainder coming from newly issued HEXO shares.

Now what

Of course, when the Redecan deal was announced, HEXO investors knew the cannabis company would be minting a pile of new shares. They might be getting weary of the company's frequent dilution, though, as commonplace as this might be in the marijuana industry.

After all, HEXO loves floating new stock. In barely over 2 1/2 years, its number of shares outstanding has more than tripled to over 152 million.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends HEXO Corp. The Motley Fool has a disclosure policy.

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