Turnover is nothing new for top cannabis producers in Canada, even at leadership levels. Bruce Linton (Canopy Growth), Vic Neufeld (Aphria -- which is now part of Tilray), Terry Booth (Aurora Cannabis), and Greg Engel (OrganiGram Holdings) are all former CEOs who left their positions atop their respective cannabis companies in recent years. The latest to join that list is Sebastien St-Louis of marijuana producer Hexo (HEXO).
What made the Hexo announcement unique was the catalyst behind it: a shareholder letter. Investors weren't happy with the direction of the business and the company now has a new boss, Scott Cooper, who comes from the packaged goods industry. Will the change make Hexo a better buy?
Image source: Getty Images.
Why were Hexo shareholders unhappy?
Hexo's board received a letter from activist investor Adam Arviv in September. According to BNN Bloomberg, which obtained a copy of it, the letter was critical of St-Louis' decisions and the company's overall financial performance. Arviv was previously an advisor to Redecan, one of the cannabis companies Hexo acquired earlier this year. The deal was worth 925 million Canadian dollars and Hexo funded it through a combination of cash and stock, which ultimately led to Arviv and Redecan becoming significant shareholders of the business.
Redecan wasn't the only cannabis business that Hexo acquired this year. In pursuit of becoming one of the top companies in Canada, Hexo also acquired cannabis producers 48North for CA$50 million and Zenabis for CA$235 million. Both of the deals were funded entirely through shares.
The dilution exacerbates an ongoing problem for Hexo with the business continuing to need to raise cash due to cash burn. It has reported negative cash from operations of CA$18 million over its last four quarters to go along with net losses of CA$214 million during that time.
Will the new CEO turn Hexo's business around?
New CEO Scott Cooper isn't unfamiliar with Hexo as he has been in charge of Truss Beverages, a joint venture between Hexo and beer company Molson Coors Canada. Prior to that, he worked at Molson, grocery chain Sobeys (owned by Empire Company), and consumer packaged goods business Unilever. Hexo's press release doesn't suggest that he will take the company on a different path, stating that his experience will help him, "defend Hexo's position as a market leader in Canada and secure our place as a top-three global cannabis products company."
If this sounds familiar, it's because Canopy Growth made a similar move when it ousted Linton in 2019. It ended up replacing him with David Klein, an executive from beverage maker Constellation Brands which today owns a 38.6% stake of Canopy Growth. And Canopy Growth hasn't been much of a success story since then as it still continues to struggle with profitability, posting losses of more than CA$1.2 billion over the trailing 12 months.
While Hexo will certainly lean on Cooper's expertise, it doesn't appear as though the company is abandoning its growth strategy. And that's why I'm hesitant to believe that this will be anything but yet another underwhelming change at the helm for a Canadian cannabis producer.
Should you buy Hexo on this news?
Hexo faces challenges regardless of who is running the business. The company has struggled to generate growth and in St-Louis' last quarter as CEO (period ending April 30), the company's top line of CA$22.7 million fell by 31% from the previous period as quality was a big issue for the business with craft producers "surprising" the company and wrestling away market share.
Moving forward, the marijuana stock is no less of a risky investment than it was with St-Louis in charge. If the company continues to eye being one of the top producers in the country, investors can be sure to expect the focus to remain on the top line and possible mergers and acquisitions to be on its radar (which could mean more dilution).
Over the past year, shares of Hexo have fallen by more than 44% while the Horizons Marijuana Life Sciences ETF has jumped by 23%. And, unfortunately, I don't see those fortunes reversing simply due to a new CEO being in place as there's nothing to suggest that drastic changes are coming that will turn the business around.
Editor's Note: Hexo provided the following statement on Oct. 28
The Company welcomes and regularly engages in constructive dialogue with our shareholders with the shared goal of enhancing shareholder value.
Notwithstanding Mr Arviv's letter, this was the right time to make this change. The departure of Sebastien marks the next stage of the Company's strategic evolution. Given HEXO's recent acquisitions, there is a real opportunity for a new leader to leverage HEXO's market-leading position to drive growth and profitability.
