HEXO Price Momentum Wanes As Post-Deal Reality Becomes Apparent

It appears upwards momentum in Hydropothecary Corp (TSE:HEXO) (OTCMKTS:HYYDF) stock is abating, following yesterday’s ↑11.03% move driven by the company’s joint venture partnership with Molson Coors Brewing Co. We attempt to make sense of the price action, and where it is going.

Of course, Molson Coors finally made a move to enter the cannabis space yesterday, after months of rumors and market backtalk. In a mildly surprising twist, Molson hitched their wagon to Hydropothecary (HEXO) by announcing a majority joint-venture partnership with the predominantly Quebec-centric operator.

For the most part, HEXO investors loved the news. Not only did the stock ramp higher by double-digits, the company experienced a record high volume session, with over 10.93 million shares trading hands. Prior to yesterday, volume had never cracked 8-figures during any individual session—although it came close at the apex of the cannabis sector’s January blow-off bubble highs (9.98 million shares, January 8). For a deep summer session where trading activity slows down, yesterday’s announcement was truly impactful.

However, with a day of hindsight in the rear-view mirror, today’s price action is suggesting that maybe the deal wasn’t so inspirational after all.

Unlike the Canopy Growth-Constellation partnership last October, HEXO did not procure a minority stake interest from the iconic beverage maker. The partnership is structured as a standalone start-up company with an independent board and management team, in which HEXO only receives a minority stake (42.5%). Furthermore, HEXO will issue an undisclosed amount of purchase warrants to Molson Coors, giving this deal a decidedly ‘pay-for-play’ feel to it.

While the deal is exciting from a distribution point of view for HEXO—which procured a valuable world class distribution channel for its strong brand—the partnership has a one-sided aura to it.

Aurora Cannabis COO Cam Battley congratulates HEXO and CEO Sebastien St.Louis on partnering with Molson Coors (36:38)

At the end of the day, Molson Coors received the most favorable terms, requiring no up-front direct investment, majority JV ownership and optionality to stake ownership in Hydropothecary as presumably favorable terms (details yet to be announced). Under such auspices, it’s understandable why the post-announcement euphoria is fading rather quickly.

Final Thoughts

This article is certainly not intended to detract from HEXO’s agreement with Molson Coors in any way. Presumably, the latter had the lion’s share of leverage in talks, which is a byproduct of much larger scale, worldwide distribution and 250-years of operating history to its name. With only a couple million dollars of revenues and largely provincial focus, I can’t imagine HEXO was in position to dictate partnership terms.

But investors shouldn’t expect an ongoing ‘Molson premium’ in the common shares for the time being. The transaction closing is a little under two months away (September 30, 2018), and several open-ended structural and warrant details remain unanswered. Although strong yesterday, HEXO shares finished near session lows, providing prelude that yesterday’s action was more one-off and not a precursor to a multi-day run.

Original article: HEXO Price Momentum Wanes As Post-Deal Reality Becomes Apparent

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