What happened
Shares of marijuana stocks lit up on Tuesday -- and for a change, this time the rally had little to do with the prospects for marijuana legalization on Capitol Hill. In Tuesday afternoon trading, as of 12:10 p.m. ET:
- Hexo (HEXO) stock is up 4.2%.
- Tilray Brands (TLRY) is up 1.8%.
- And Sundial Growers (SNDL) shares are rising 3.1%.
Image source: Getty Images.
So what
Today's rally began with a joint press release from Hexo and Tilray, which this morning announced a tie-up that will see Tilray buy the rights to collect Hexo's $193 million, as the two companies join forces in a "strategic alliance."
Seeking "cost saving synergies," say the companies, Tilray will buy out the remaining $193 million balance of a Hexo senior secured note that is "convertible" into stock, and currently held by HT Investments MA LLC. Simultaneously, the terms of this note will be amended to give Tilray the right to convert the debt into equity in Hexo at roughly $0.67 per Hexo share (i.e., about 15.5% more than Hexo stock currently sells for).
Once Tilray takes over the debt, Hexo will pay Tilray 5% annual interest on said debt (so about $9.6 million), and also pay Tilray $18 million annually for "advisory services" (so about $27.6 million annually in total). Tilray notes that this makes the deal "immediately accretive" to Tilray's profits.
Additionally, Tilray and Hexo will be cooperating in their businesses going forward, with the goal of saving up to $80 million annually between them, within less than two years from now.
Finally, Tilray will enlist "an affiliate of KAOS Capital Inc." to buy 5 million Canadian dollars worth of Hexo stock every month over a period of 36 months, resulting in a total CA$180 million cash infusion into Hexo to help it pay the interest and fees on its debt.
Now what
In addition to the synergies mentioned, this deal appears calculated to move the two companies toward a merger, with Tilray noting that at the above-mentioned conversion price, it should have the option of converting its Hexo debt into Hexo shares -- about 35% of Hexo's shares currently outstanding, in fact. At the very least, this will tie the companies closely together. At most, it could put Tilray well along the way to acquiring Hexo outright.
Which brings us to Sundial: The above details make clear that this deal appears to be good news for Tilray, and for Hexo as well (Hexo may lose some independence, but its balance sheet will improve). But why is this good news for Sundial -- why is Sundial stock up nearly as much as Hexo stock?
Simply put, the more mergers and acquisitions in this industry, the less the price competition among marijuana companies -- and logically, this should result in improved marijuana prices, better revenues for marijuana companies, and improved profit margins as well. There's also the possibility that, if more and more marijuana companies start merging, then Sundial itself could become a target.
With two potential routes to stock prices moving higher, it's no wonder marijuana stocks are glowing green today.
