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HEXO acquiring Newstrike Brands in C$263M all-share deal

Canadian cannabis company HEXO Corp. will acquire Toronto-based Newstrike Brands Ltd. in an all-share transaction valued at about C$263 million.

Newstrike is the parent company of Up Cannabis Inc., a licensed producer of cannabis that is licensed to both cultivate and sell cannabis in all acceptable forms.

Under the terms of the transaction, Newstrike shareholders will receive 0.06332 of a HEXO common share for each Newstrike common share held.

HEXO shareholders will own about 86% and Newstrike shareholders will own 14% of the combined company after the completion of the deal.

In a March 13 news release, HEXO said the acquisition has been approved by boards of both companies and that Newstrike's board is advising shareholders to vote in favor of the deal.

Completion of the deal is subject to approval from Newstrike's shareholders at a special meeting, the receipt of certain regulatory court and stock exchange approvals and the satisfaction of other customary conditions.

HEXO, a packaged goods cannabis company, has entered into irrevocable hard voting support agreements with Newstrike's directors and officers, along with certain other shareholders, which represent about 25% of Newstrike's issued and outstanding common shares.

The deal includes a termination fee of C$7.5 million payable by Newstrike to HEXO if the agreement is terminated in certain specified circumstances, as well as a reciprocal C$1 million expense reimbursement fee to either party if the deal is terminated based on certain other specified cases.

The transaction will bolster HEXO's cannabis production capacity through the acquisition of cultivation space.

In addition, the acquisition will help HEXO achieve diversified domestic market penetration since the two companies combined have distribution agreements in eight provinces of Canada including Ontario, Quebec, British Columbia, Alberta, Saskatchewan, Manitoba, Nova Scotia and Prince Edward Island.

RBC Capital Markets is acting as the exclusive financial adviser to Newstrike, with Stikeman Elliott LLP as legal counsel. Osler Hoskin & Harcourt LLP is acting as legal counsel to special committee of the board of Newstrike. Norton Rose Fulbright Canada LLP is acting as legal counsel to HEXO.

Financial outlook

HEXO estimates net and gross revenues from the sale of cannabis in Canada for fiscal 2020 will be in excess of C$400 million and C$479 million, respectively, assuming the completion of the deal. In addition, the combined entity is estimated to realize annual synergies of C$10 million.