Is Tilray Stock a Buy With Its Acquisition of Hexo?

Some corporate buyouts come as a total shock. Others aren't surprising in the least. I think you can include Tilray Brands' (TLRY) planned acquisition of Hexo (HEXO) in the latter category.

Tilray announced after the market closed on Monday that it plans to buy Hexo for a total of around $56 million in an all-stock transaction. The deal is expected to close in June 2023 but must first clear regulatory hurdles and win approval from Hexo shareholders. 

Shares of Tilray have plunged more than 50% over the past 12 months. But is the beaten-down marijuana stock a buy with its acquisition of Hexo?

An acquisition that anyone could see coming

To call Hexo's path over the past few years challenging would be a huge understatement. The Canadian cannabis company has gone through multiple changes in its executive ranks. It has hemorrhaged money.

Arguably one of the few bright spots was former CEO Scott Cooper's strategic alliance with Tilray announced in March 2022. This agreement allowed Tilray to acquire $211 million of Hexo's senior secured notes. The two companies also committed to work together to achieve cost-saving synergies.

But it was clear back then that an acquisition would likely be on the way at some point. Tilray chairman and CEO Irwin Simon said in the press release announcing the alliance that the deal "provided a path for meaningful future equity ownership of Hexo and enables us to participate in Hexo's share price appreciation as it continues to execute on its growth initiatives."

That share price appreciation mentioned by Simon never materialized. Hexo stock was down nearly 80% over the past 12 months before the acquisition was announced. However, this decline gave Tilray a chance to buy Hexo on the cheap. The deal will allow Tilray to further solidify its No. 1 market share in the Canadian cannabis market.

The rest of the story for Tilray

Like its peers, Tilray continues to face what the company called "challenging cannabis market conditions." However, Tilray still managed to eke out some incremental improvement in its latest quarter. 

In addition to announcing the Hexo acquisition, Tilray reported its fiscal 2023 third-quarter results on Monday. The company's net revenue rose to $145.6 million from $144.1 million in the prior quarter. Tilray's distribution revenue grew 5% year over year to $65.4 million. 

Although Tilray posted a net loss of nearly $1.2 billion in Q3, most of the loss, $1.12 billion, was due to a non-cash impairment related to higher interest rates and the stock's decline. The company also delivered its 16th consecutive quarter of positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).

Perhaps the most encouraging news from Tilray was that it still expects to generate positive free cash flow from operating segments in its current fiscal year. The company also maintained a strong cash position with $408.3 million in cash and marketable securities.

A buyout buy?

There are some valid reasons to consider buying Tilray stock. However, I don't think the Hexo acquisition is one of them. It's not a bad deal, in my view, but it simply isn't enough to move the needle for Tilray very much.

Tilray is certainly in better shape than some cannabis companies. The main problem, though, is that the cannabis industry's headwinds haven't subsided so far. Perhaps in the future, Tilray will be more attractive to investors. For now, there are too many other stocks with better risk-reward propositions.