Newstrike Brands Ltd (CVE:HIP) (OTCMKTS:NWKRF) (FRA:0N8) CEO Jay Wilgar is thrilled with the company’s acquisition by Quebec-based HEXO Corp (TSE:HEXO) (NYSE-A:HEXO) (FRA:74H). Wilgar believes the all-share $263 million transaction provides considerable synergies between the two companies and allows the combined entity to create a truly national branding strategy. The deal combines HEXO’s strong brand presence in Quebec with Newstrike brand Up Cannabis’ national footprint. Wilgar discusses how the deal dramatically increases HEXO’s production capacity while allowing the combined companies to function more efficiently. The combined entity is anticipating $400 million in revenue from cannabis sales in 2020.
Narrator: Newstrike Brands, Limited is the parent company of UP Cannabis Inc., a licensed producer of cannabis. Newstrike currently has two cannabis facilities in Ontario: an indoor grow room in Brantford, and a greenhouse in Niagara. Both facilities are licensed to cultivate and sell cannabis for the recreational market under the UP Cannabis brand.
Newstrike has just been acquired by Quebec cannabis company HEXO Corp., in an all-share transaction valued at approximately $263 million, subject to shareholder approval.
Newstrike Brands, Limited is listed on the TSX Venture under the ticker symbol HIP.
James West: I’m joined now by Jay Wilgar, CEO of Newstrike Brands. Jay, welcome back.
Jay Wilgar: Hey, always good to be here – one of my favourite shows to do, so thanks for having me back again.
James West: Oh, good! Jay, give me an overview: what’s the upside for investors in Newstrike now that HEXO is about to become the proud owner?
Jay Wilgar: Well, you know, first of all, we’re very excited about this transaction. I think it goes without saying that we’ve seen as a company, and we’ve been looking for a partner that really makes a lot of sense for us. HEXO, and the synergies that we see between Newstrike and HEXO, are enormous, and quite frankly, when we look at creating a national brand strategy with HEXO and with our company, and the associated synergies and what we have together, we see tremendous value for shareholders in this deal.
James West: Sure. Helps to start with the two most populous provinces in the country. [laughter]
Jay Wilgar: Bingo. You go, Quebec, Ontario, Alberta.
James West: Exactly.
Jay Wilgar: And that’s one of the things, you know, you look at it and you say, HEXO’s got such a phenomenal brand presence in the Quebec market; we’ve established very good distribution across the rest of the country, and you look at the synergies that we can have as a combined entity and it was one of those deals that just really made a lot of sense.
And look, we all know that consolidation is inevitable in this market, and for us, and for our shareholders, we think it’s a tremendous deal with great upside.
James West: Yeah. So does this mean that we’re going to see the sign on the outside of that big brewery up here on 401 change from Molson to HEXO? [laughter]
Jay Wilgar: From Molson to HEXO? Hey, that I don’t know yet, but, you know, again, you look at partnerships, and you look at when Sebastien and the management team – and by the way, I mean, a phenomenally strong management team, and as we all know, that is going to be one of the key drivers in this sector, is management teams that can execute – but when we look at bringing together, you know, they’ve got the Molson-Coors partnership, which is a tremendously valuable partnership.
Of course, our deal with The Tragically Hip and the Neal Brothers, our distribution, and combined, you know, we’re looking at $400 million in projected revenue now for 2020, which I think is a very achievable number.
James West: Yeah, and that’s probably one of the higher numbers among all the LPs listed in Canada, not just in Canada, but also among the MSOs.
Jay Wilgar: I think so, yeah.
James West: $400 million in revenue for 2019?
Jay Wilgar: 2020.
James West: 2020, okay. Well, that’s going to be interesting to see. So how did this come about? I’m just curious – was it a case of you had a relationship previously and it’s always been a topic of conversation, or was it more that one approached the other and said Hey, why don’t you consider this? Or, like, what was the catalyst?
Jay Wilgar: You know, so we first got together for really a conversation back in November, and then from there, our team went up and visited what was going on in Gatineau and started meeting some of the management team and looking at the operations. You know, if you look at this sector, and I’ve talked to you many times about this, the one thing that is critical is management, and how teams get along. And if you look at HEXO’s approach to this market and Newstrike’s approach to the market, very similar, and we maintain very similar stories all the way along, even though, to be blunt, there was never really a previous relationship of any significance prior to that.
So we looked at it, and both were very brand-focused, both very focused on getting into edibles and beverages and, you know, high-value derivative products, and then when we started looking at it from Newstrike’s point of view, we started realizing: hey, there’s an opportunity here to go from where we were as a company, where we are as a company and the skills that we have and the relationships we have, put these two together, and be part of something that we think is much bigger, and quite frankly has a chance to really crack into that Top 3 in the Canadian marketplace. That’s our view.
James West: Right. Does this in any way sort of accrete the combined sort of distribution power, or the shelf space, rather, in the various provincial cannabis stores online? So I noticed that UP Cannabis is now selling in Ontario, and where else?
Jay Wilgar: So UP, we have seven provinces right now, and you know, of course, BC right now, there’s not a lot of product being sold in BC. So our two primary provinces are Ontario and Alberta; HEXO, obviously, primarily in Quebec but also across the country.
I think the number one thing, if you look at it from an efficiencies point of view, so you’ve got HEXO’s facility in Gatineau, which is a spectacular site, and I’ve seen a lot of the sites in Canada and it really is one of the best I’ve ever seen.
James West: Yeah. We’ve been there.
Jay Wilgar: Oh yeah, that’s right, you filmed a segment there.
Our Niagara site, which is also a spectacular site, which I believe you’re coming to on Thursday to have a look at; and then you look at the Belleville site that HEXO recently acquired and their plans for huge amounts of processing capacity there, and the idea, then, of course, is that really starting to become that much more efficient as one company. So we’re not duplicating efforts in a whole series of things. And really, when you look at that, I think that’s probably one of the most valuable things about this transaction.
James West: So will you stay on to run the Newstrike/UP brand as a separate division in Ontario, or are they going to take over completely and you’re on vacation?
Jay Wilgar: You know, that’s, no, Sebastien and I are scheduled to spend some time together to really look at how the teams integrate. And of course, that becomes a critical piece in the whole thing, too, is the integration of these two teams. You know, we have 200 employees right now; HEXO has just over 600. We have plans to expand in our Ontario facilities, and they certainly do as well.
So where that shakes out, I will say that, you know, the idea here is certainly not trying to get efficiencies by getting rid of people, because that’s not what we’re trying to do; it’s actually quite the opposite, and you know, when I look at my role within the company, certainly I will continue to make sure we transition through this, and see where things land at that point.
James West: Sure, you bet. So then, I’m trying to now understand: is the marketplace in Canada getting less crowded, or more crowded? [laughter] Because I mean, certainly when consolidation occurs, arguably there’s less players in the marketplace, but you know, as one disappears, it sort of opens up opportunity for new players.
Jay Wilgar: Well, I think again, this is – and you and I have talked many times about this process in this whole thing, you know – again, this is not a point in time where all of a sudden cannabis is legal and let’s dive in here. I think if we look at this from a business point of view again, it’s the evolution of an industry, where you see consolidation, you see efficiencies happening both on the cost of production side of things, on the distribution side of things, and for us in this partnership, again, you know, hitting that $400 million in revenue mark really comes down to creating really good branding.
And branding is, I think, we continue to talk about, HEXO talks about it, becomes the key here, because at the end of the day, we all know that there is a huge amount of production capacity in the country. But ultimately, what’s going to win out when it comes to the consumer, and certainly our collective view is that brand recognition, and also creating products that people want.
So HEXO, as you know, Product of the Year last year with the sublingual spray that they have; a fantastic product, and I think you’ll see some really exciting things coming out of the combined entity over the coming months.
James West: That’s exciting. All right, well, we’ll leave it there for now, Jay. It was great to get an update from you, and we’ll come back to you soon and hear how the amalgamation is going. Thanks for joining me today.
Jay Wilgar: Thank you so much, James. Appreciate it.
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