Hexo (TSX:HEXO) has a great job of uniquely positioning itself as a prime candidate for an eventual takeover by a larger publicly traded competitor.
For one, it’s currently trading at a market capitalization of a little more than $1.75 billion. This company sits firmly above the “riff-raff” of cannabis stocks but is still cheap enough to be easily affordable to a much larger suitor.
While $1.75 billion may sound like a lot to ordinary people like you and me, when you consider the sheer magnitude of mega-cap businesses like Procter & Gamble, Kraft Heinz, and even Canada’s own Loblaw, the company’s price tag wouldn’t amount to much more than a light snack at the local cafeteria for these giant whales.
Meanwhile, in terms of its planned production capacity, in its most recent investor presentation, management suggested the company is guiding for annual production of somewhere near 150,000 kg annually.
That’s likely going to be a significantly smaller operation than where competitors like Canopy Growth and Aurora Cannabis eventually end up when all is said and done, but that doesn’t mean that its plans for the future are any less significant.
In fact, when I read through the company’s recent investor presentation, it looks to me as though rather than competing on the basis of size and scale, the company’s plans are to go after an entirely different market altogether.
I believe this market could make this company a potentially very lucrative takeover opportunity for a larger packaged-goods company (including those names that I mentioned above), provided they’re eager (and prepared) to start getting involved in the rapidly expanding market for cannabis and cannabis derivatives.
Foolish bottom line
In its investor presentation, management makes no bones that its strategy is to position itself as the premier branded “Ingredients for Food” cannabis company globally, with intentions to selectively partner with market leaders spanning across a variety of consumer goods industries.
Just last August, it announced a joint venture with alcoholic beverage maker Molson Coors Canada to produce a line of cannabis-infused adult beverages.
The winner of the 2018 Canadian Cannabis Award for “Product of the Year” and “Innovation of the Year” not only brings its experience in developing innovative and appealing cannabis products to the table, it also has a significant IP portfolio including patents still pending, licensed infrastructure, regulatory know-how, and distribution already in place, including delivery systems across most Canadian provinces.
I could easily see a company like Proctor and Gamble, Johnson & Johnson, or even Molson Coors snapping this company up to gain full control of its production facilities, IP portfolio, and experienced management team.
This is certainly one of Canada’s top cannabis stocks, in my view, and one that I’ll be continue to watch closely.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Jason Phillips owns shares of Molson Coors Brewing.