Zenabis (ZENA.TO) – Merger Arbitrage – 25% Upside

Current Price: C$0.125

Offer Price: C$0.157

Upside: 25%

Expiration Date: TBD

Press release

This idea was shared by Axel.


On the 16th of February, Canadian cannabis operator Zenabis announced that it will be acquired by its larger peer Hexo. Consideration stands at 0.01772 HEXO shares per each Zenabis share (total value around C$200m), which at the moment offers a 25% spread. Both companies have listings in USD and CAD. IB shows 300k+ shortable HEXO shares available at a 10% annual fee, which makes a minor impact to the upside assuming the merger closes in 2-3 months – a similar-sized (C$263m) previous acquisition by Hexo closed in this timeframe.

This is a strategic merger and the buyer has already done similar size mergers before. Shareholder approval seems likely, however, there is some uncertainty regarding the Bevo Farm sale condition (more below). Further information on the transaction should be provided in the circular (to be filed this/next month). The meeting date has not set yet.

The downside is limited due to all Cannabis industry stocks currently trading elevated at elevated due to prospects of US federal approval later this year. Pre-announcement price stands at C$0.16/share, which is above the current price.



Conditions include approval from te 2/3rds of Zenabis shareholders. Management owns 28% of the company. In the past few years, Zenabis has been a cash-burning dilution machine. Since Q1’19 the number of outstanding shares increased 7x. In 9M’20 ZENA burned C$22m cash and at the end of Q3 only had $5m of cash left. Another C$15m dillutive equity issuance was announced recently. Zenabis is also being pressured by its high debt load, with competitors aiming to take advantage of the situation – at the end of last year, the company had a conflict with one of its peers Sundial, which made a strategic investment in one of Zenabis’ lenders and tried to pressure the company into an exclusivity agreement in case of sale. At the time Zenabis had already been in talks with Hexo. Aside from the prospects of U.S. federal legalization, the whole Canadian cannabis industry is still under significant pressure due to demand/supply imbalance – Zenabis sells only 30%-50% of its quarterly production, while the newly started European operations through JV are in still in very early stages and limited in size. In light of this and with management’s support shareholders are likely to agree to the merger.

Further conditions include a successful sale of the Zenabis propagation and flower business (vegetable and pepper plants) Bevo Farms and “the termination and unconditional release of the guarantee provided by Zenabis in favor of Bank of Montreal in connection with the disposition of Bevo Farms”. More details were not provided, but should be included in the upcoming circular. Bevo Farms sale was announced in January and should result in Zenabis debt reduction by C$42.5m (was C$112m as of Q3) and includes a deferred consideration of C$25m cash. The company has also agreed on better rent terms for one of its British Columbia facility, owned by Bevo Farms. The buyer is Langley Propagation and Floral (limited information available online). Overall, this condition and lack of more information adds some uncertainty to the situation.


Strategic rationale

The strategic rationalle is clear. Hexo is getting close to its production limits – TTM production was 75k kg, while in Q3 it sold 90%+ of its production. In mid-2019, the company has already tried to expand its production capacity via the Newstrike acquisition ($263m), however, it ended up as a fiasco – when after the merger was completed HEXO found out that Newstrike was selling cannabis without a license and had to shut down the facility accounting for 90% of Newstrike production. Merger with Zenabis will add an additional 111k+ kg of capacity, more than doubling the current limits of the buyer. Hexo strategy is to partner with leading customer packaged goods companies through JVs and sell the products through existing distribution networks of JV partners. Recently Hexo has partnered with Molson Coors and aims to enter the Colorado CBD beverage market while preparing for the potential US federal-level legalization later on this year. The merger also offers expansion opportunities in the European and Australian markets through Zenabis’ JV with ZenaPharma. Just recently, HEXO received an EU trademark for their CBD beverage brand ‘Powered by Hexo’.

Finally, although both companies are still unprofitable, the numbers have been improving with the COVID-19 outbreak. Zenabis adj. EBITDA has even turned positive over the last two quarters (Hexo is still negative). The merger should catalyze a faster approach to profitability. The companies expect C$20m synergies through the gross margin improvements, additional capacity utilization, and overhead cuts (combined TTM SG&A was C$66m).

zenabis 2



Hexo grows and sells cannabis throughout Canada (covers 90%+ of the population). The company operates 4 facilities with a combined annual capacity of 90k kg production.



The company operates 3 facilities with 111k kg production capacity. It also has EU export license and operates a JV with ZenPharm for import/export into Germany, Malta, Israel, and Australia. The first product shipment to Malta was done in Dec’20.


26 thoughts on “Zenabis (ZENA.TO) – Merger Arbitrage – 25% Upside”

  1. HEXO is now at $6.5 so * 0.01772 = $0.115 which is where the bid is on ZENA.

    I take it the spread is now eliminated?

    • I think you are mixing up Canadian and U.S. listings – so far spread remains at similar levels as indicated in the write-up.

      • You are right. I typed in HEXO and was looking at $6.5 on the US exchange and ZENA.TO at $0.115. I didn’t realize there was a HEXO.TO. Thanks.

      • I am showing HEXO (US) @ 6.52 and HEXO.TSE @ 8.13. consideration currently showing HEXO.TSE equivalent ZENA @ .113. Is that correct?

    • you’ll see ZBISF on otcmarkets.com. I can see ZENA on the TSE with IB. Maybe it’s a permissions issue?

  2. Hi I have a question how to initiate stock merger trades like this – do most of us here use tradework station (TWS) to make the trade? I see the merger arbitrage function on TWS. Is that how most of us do this?

    Technically you can just initiate a standard long and short trade separately or use contingent orders but it seems risky from the sense that one of the “legs” might not fufill and relatively illquid, and given the lack of liquidity, it might not capture the spread I want. Any input or advice is appreciated.

    • I’ve been trying to build a standard long position in the stock being acquired in a registered account at another broker and, as I get filled, short the acquirer (which is usually quite liquid) in TWS. It requires a bit of finesse and could very well be the wrong approach. I would not want to do it the other way around due to the spread on the penny stocks and illiquidity. TWS doesn’t let me use the merger arb tool on TSX venture penny stocks, maybe others can. Then I’ve got to close it out on both ends as well of course.

      • Right that’s what I thought. I tried entering in the trade and it doesn’t seem to work using the function. If you’re doing it the old fashion way (separarately) You really have to watch it like a hawk and once the first one fills, you need to hound in and make sure the second leg is fulfilled at a price that makes sense for the arbitrage. But it’s risky because you are at mercy of the market. Even if the illiquid one fills separately you don’t know what the spread level exactly is. If both positions have been declining, one will get fulfilled eventually with limit orders, regardless of spread. That’s why the TWS tool is needed. It’s to lock in the spread, not price.

  3. Cost of the borrow has shot up over 50%. Where do you look at taking the hedge off?

    • I was thinking about the same thing. Personally its tricky because you don’t want to leave yourself totally unhedged and be exposed to the fluctuations. I like to hedge at least 50% and go from there, especially when the short interest is this high. Or, adjust the weight of ZENA.TO accordingly and have a smaller size, especially if you want to leave more of it unhedged.

  4. ZBISF (OTC in US) holders will receive HEXO (nyse), or HEXO.TSE (toronto) shares in the merger? Will US holders of ZBISF face any tax issues, aside from the usual US cap gains tax upon sale of HEXO?

  5. borrow fee is increasing further. It currently is at/around 97.3%, so consuming almost 2% per week. With around 4 weeks until possible closing, that’s about 8% of the spread. Yesterdays rally might be due, at least partially, to a research piece that BoA published on the cannabis industry.

  6. Thank you for the heads-up guys. Borrow has increased to over 240% now and it seems no longer worth keeping this idea active. These kinds of micro-cap hedges always come with a certain borrow-related risk, however, it’s been a while since we had a fee increase of this magnitude. Anyways, 12% profit minus 4% by borrow costs (my estimate, as borrow stood at 10% for most of the time and started increasing only recently), still resulted in 8% profit in 2 months. 

    • Are you sure about the 12% profit? I could very well be looking at the wrong numbers, but it seems the spread was 25% at time of write-up vs 23% as of now.

  7. 12% profit? I’m underwater if I exit at the bid on Zena and that’s before borrow costs. YMMV

  8. My bad guys – missed a typo in my calculations. Thanks for correcting.

    You are right – before the borrow costs this resulted in 2%-3% return and I estimate borrow has eaten c. 4%. Again, correct me if borrow ended up being more expensive, but I understand that fees spiked only during the last week. Had no position, so unable to check the actual costs.

  9. For anyone still in this trade the borrow in Canada has today spiked up as well. I had managed to exercise some Canadian puts and the borrow had been 11%. Now 250%. I bought in my short on April 29th (Thursday) but IB still charged me the borrow fee up to and including May 2. Is this normal? Any brokers that handle short interest and the settlement differently?

    • This is normal; borrow is always charged until date of settlement, which is 2 business days after trade date.

      • When borrow rates shoot up to +300% on a Thursday is there any way to avoid it? I know if it’s a same day position you don’t get charged but you’ll get billed on the existing position until settlement. That’s an instant loss of almost 5%. I presume you can’t buy and lend out until settlement and there’s no guarantee your shares will be borrowed. Am I missing something? Is there any transparency on DOM of the lending rates so you can potentially see this coming?

  10. Merger approved by shareholders. Court approval 5-18, closing about 6-1. ZBISF bid/ask 9.5c-10.5c, HEXO 6.10, resulting spread at 3-15%.

    “Completion of the Arrangement remains conditional upon approval of the Supreme Court of British Columbia (the “Court”) and certain other customary closing conditions. The application for the final order from the Court is anticipated to be heard on May 18, 2021. Closing of the Arrangement is expected to occur on or about June 1, 2021, subject to the satisfaction or waiver of all applicable conditions precedent.”


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