‘Mispriced’ Pot Stock Hexo Looks to New York to Boost Profile
(Bloomberg) -- Hexo Corp., a cannabis producer that’s flown under the radar of the pot-stock frenzy, is looking to the Big Apple to get a little more attention.
Hexo is following better known rivals such as Canopy Growth Corp. and Aurora Cannabis Inc. to list shares on the New York Stock Exchange in December. The Gatineau, Quebec-based company, which sees itself as a potential takeover target as it ramps up partnerships with food and cosmetics companies, is betting the listing will attract more global investors.
“It should help tell Hexo’s story as one of the world’s biggest cannabis products makers,” Chief Executive Officer Sebastien St-Louis said in a phone interview. “In five years there may be four global cannabis companies and whether Hexo is a buyer or a seller on that journey, what matters to us is for our shareholders to participate in that to become one of the four.”
With a market value of about C$1.1 billion ($840 million), Hexo is dwarfed by rivals like Canopy and Tilray Inc., which are more than 10 times larger. St-Louis argues the company deserves a higher valuation given its supply contract with the Quebec government, and its joint-venture with Molson Coors Brewing Co. to develop pot-infused beverages. The supply deal with Canada’s second-most populous province is valued at about C$1 billion.
In September, investor Riposte Capital published a letter criticizing the company’s “severely depressed valuation,” urging it to consider four options that include selling at a premium or going private.
“The fundamentals for Hexo are incredibly robust and that cannot be said for the majority of their peers,” Khaled Beydoun, Riposte’s managing partner, said in an interview this month. “When you take the fundamentals, and you look at the valuation, the resulting conclusion is there is a huge mispricing.”
Investors have been dumping the shares since Canada legalized pot on Oct. 17, concerned that the surge leading up to legalization left them overpriced. The BI Canada Cannabis Competitive Peers index tumbled 23 percent between then and Friday’s close. Hexo is the 10th-best performer in the Horizons Marijuana Life Sciences index this year, with a gain of 42 percent.
St-Louis shrugged off the market volatility, saying some investors cashed in after the steep increase of the past few months. He also said that a lot of Riposte’s suggestions made sense to increase the company’s value -- a change of tone from seven months ago, when his stated goal was to emulate Alimentation Couche-Tard Inc. The convenience-store giant has been gobbling up rivals at home and abroad.
“It’s certain that if someone comes and offers a 150 percent premium tomorrow, we are for sale,” said St-Louis, who co-founded the company five years ago and has a stake of almost 2 percent, according to data compiled by Bloomberg.
St-Louis expects investors to take stock of Hexo’s strengths with its upcoming earnings reports, which will reflect sales in its home province. The five-year supply contract gives it about a third of the legal recreational market.
The company reported revenue of C$1.4 million for the quarter ended July 31. Unlike Canopy or Aurora, it doesn’t hold a call with analysts to discuss earnings.
Since a sale could happen “next month or in 10 years,” St-Louis says he’s focused on setting up more joint ventures with partners that could later buy Hexo. Adding patents on cannabis-infused products will make the company more attractive, he said.
“If we keep innovating and adding better products, better ways to consume cannabis without smoking, that intellectual property will keep increasing our value,” he said. “At some point, whether it comes from one of these partners, or from another cannabis company, it’s bound to happen that Hexo will consider an offer.”
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