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Why Hexo Shares Crashed on Friday

By Howard Smith – Aug 20, 2021 at 11:02AM

Key Points

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The company announced the pricing of a new share offering.

What happened

Canadian cannabis producer Hexo (HEXO -8.18%) just announced pricing on its latest share offering, and it wasn't what current shareholders wanted to see. As of 10:40 a.m. EDT Friday, Hexo's stock was down 25%. 

So what

The company said it would price its previously announced offering at $2.95 per unit. That price is just 8% below the stock's closing price on Thursday. But there's more to the story, which is why stock is trading below $2.40 per share this morning.

A marijuana leaf on top of a declining stock chart next to a red arrow pointing down.

Image source: Getty Images.

Hexo said each unit consists of a common share as well as one half of one common share purchase warrant. Investors expect those warrants may also be converted into common shares ultimately, adding to the dilution caused by the offering. However, the warrants will be exercisable for a five-year period at a price of $3.45 per share, meaning the added dilution will only occur if shares hit that price. The problem for current investors is that even a share price of $3.45 is still about 50% below where the stock traded just over two months ago. 

Now what

Hexo has been aiming to grow through acquisitions, having purchased three companies since May 2021. The largest was the purchase of Canadian grower Redecan for the equivalent of about $765 million. Redecan was Canada's largest privately owned licensed pot producer.

The acquisitive nature of its growth has already heavily diluted existing shareholders. Hexo said the proceeds from the latest share offering will be used "to satisfy a portion of the cash component of the purchase price payable to the Redecan shareholders." But Hexo investors aren't at all happy at the low share price level and resulting additional shares it will take to make that payment.

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

Stocks Mentioned

Hexo Stock Quote
Hexo
HEXO
$0.17 (-8.18%) $0.01

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