What happened
The share prices of many Canadian cannabis companies often move largely in tandem based on general sector news and any progress toward federal marijuana legalization in the U.S. But on Tuesday, the bigger names are getting some love from Wall Street while smaller Canadian pot stocks are dropping.
Shares of Tilray Brands (TLRY 0.86%) and Canopy Growth (CGC 1.92%) were up 6.4% and 5%, respectively, at their highs of the session. As of 1:24 p.m. ET, Tilray and Canopy were still up 4.1%, but smaller player Hexo (HEXO +0.00%) was down 6.9%.
NASDAQ: TLRY
Key Data Points
So what
The moves are likely explained by some news out of Tilray and Hexo. Back in March, the two companies entered into a strategic alliance. The agreement called for Tilray to purchase senior secured convertible notes in Hexo. But Hexo stock has plummeted about 60% since that deal was inked, and now, the two have agreed to change its terms.
NASDAQ: HEXO
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Now what
Tilray CEO Irwin Simon said the companies still expect the same level of cost savings through synergies. But the way the deal was amended is clearly in Tilray's favor. In addition to an additional discount to Tilray's purchase price, it includes a significant lowering of the conversion price from 0.85 Canadian dollars per share to CA$0.40 per share.
Hexo said in an announcement that changes were necessary "in view of current stock market conditions and in order to reduce closing risk related to the pre-amendment minimum liquidity closing condition."
Tilray has been using acquisitions and the alliance with Hexo to grow in size. It has established a presence in the U.S. with its ownership of craft brewer SweetWater Brewing, Breckenridge Distillery, and hemp products company Manitoba Harvest. It is also expanding in Europe, all with the goal of generating $4 billion in annual revenue by the end of its fiscal 2024.
NASDAQ: CGC
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Canopy Growth has similarly announced plans to acquire Wana Brands, the top cannabis edibles brand in North America, as well as Jetty Extracts, a top 10 cannabis brand in California. Both hope that they will be able to leverage their assets in the U.S. should federal legalization ever occur.
But it now seems to be turning into a game of haves and have-nots among the Canadian companies. Tilray and Canopy Growth have market caps of $1.6 billion and $1.35 billion, respectively. But Hexo is struggling, and its valuation is close to dropping below $100 million.
The bigger players are taking advantage of their size and positioning themselves to weather any downturns. And they hope to be better positioned if they can gain entry into the U.S. for their cannabis offerings. Tuesday's amended agreement between Tilray and Hexo shows the larger companies have the upper hand.
