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Why Hexo Stock Got Higher Before Leveling Out Wednesday

By Eric Volkman – Aug 25, 2021 at 6:20PM

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Shareholders give the nod to a potentially beneficial acquisition...which also happens to be rather expensive.

What happened

Canadian marijuana company Hexo (HEXO 8.24%) was a bit of a yo-yo stock on Wednesday, with its price rising toward lunchtime before cooling off later in the day to ultimately trade sideways from Tuesday's close. That was mainly in reaction to a new development with a recent company acquisition.

So what

Hexo announced that shareholders overwhelmingly approved its acquisition of a peer Canadian marijuana business, privately held Redecan. According to the company's count, over 96% of voting investors gave the deal the nod.

Marijuana leaf with sun shining behind it.

Image source: Getty Images.

The company announced the Redecan buyout in May. By the standards of the always budget-challenged pot industry, it's a fairly large one, at a total of roughly 925 million Canadian dollars ($733 million), although Hexo is paying CA$400 million ($317 million) of that in company stock. The remainder will be in cash.

It's always encouraging when a sensible acquisition is pushed through, even more so when a shareholder vote on the matter is so heavily in favor of it. This particular one also vaults the enlarged Hexo into the No. 1 slot in the recreational marijuana league in Canada, with a 17% market share that tops current lead dog Tilray's 15%.

Now what

But the initial happiness on the news could have been tempered by that high price tag. Yes, the deal is not being entirely settled in cash, but the equivalent of $733 million is still a big chunk of change. On top of that, the stock component will come from newly issued shares of the company, making it the latest in an increasingly long series of shareholder-dilutive issues.

Eric Volkman 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 Corp. Stock Quote
HEXO Corp.
HEXO
$0.19 (8.24%) $0.01
Tilray Brands Stock Quote
Tilray Brands
TLRY
$4.58 (9.83%) $0.41

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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