'It's just been Armageddon': Hexo's activist investor wants to oust the CEO, again

The activist investor waging a proxy battle to replace members of Hexo’s (HEXO.TO)(HEXO) board of directors also has a new CEO in mind for the embattled pot firm. 

Adam Arviv’s scathing letter to the company’s board ousted Hexo co-founder Sebastian St-Louis from the C-suite in October. Now, he says removing new CEO Scott Cooper could factor into his plans to help boost the company’s dwindling stock price. Arviv says his battle with Hexo is aimed at reclaiming lost value for the former owners of Redecan, the large privately-owned pot company that he led into a $925 million cash-and-share deal with Hexo last year. 

Ottawa-based Hexo is currently the top-ranking pot producer by retail sales in Canada. At the same time, the company is reeling from internal struggles, and at risk of seeing its stock removed from the Nasdaq exchange for failing to meet minimum bid price requirements.

Hexo agreed to pay $400 million in cash and $525 million in shares for Redecan in a deal announced on May 28. Toronto-listed shares have dropped more than 90 per cent since then.

“It’s just been Armageddon,” says Arviv, who explains that he was tasked by his friends, the owners of Redecan, last February to find a publicly traded partner for the popular cannabis company. “I’m embarrassed that I introduced them to such a dysfunctional group of people. That’s why I’m fighting.”

In September, Arviv sent a letter to Hexo’s board demanding St-Louis step down, slamming his “lack of basic business skills.” St-Louis left weeks later. He was replaced by Cooper, a transplant from Hexo’s pot drinks joint venture with Molson-Coors Canada (TPX-B.TO). 

Cooper is seeking to right the ship through an extensive cost-cutting plan, which is aimed in part at helping Hexo meet the terms of a debt financing deal to fund the company’s acquisition of Redecan.

“I have no confidence in Scott Cooper,” Arviv said in a phone interview, pointing to a perceived lack of experience in the cannabis industry. 

Arviv co-founded Ohio-based cannabis cultivator and retailer Green Growth Brands, and BRN Group, a cannabis consulting company. He is also CEO of Bragg Gaming Group (BRAG.TO)(BRAG), a publicly traded online betting company, and CEO of Kaos Capital, a Toronto-based investment firm which owns the majority of his two per cent equity stake in Hexo, according to a recent press release.

Arviv has submitted a slate of five new board members, including himself, to be voted upon at Hexo’s annual meeting on March 8. He doesn’t want the changes to stop there. He says he already has a name in mind for a new CEO, but declined to identify the individual in an interview with Yahoo Finance Canada.

“I don’t want to make anybody a target right now,” he said.

In an emailed statement last week, a Hexo spokesperson called Arviv’s activism “an unhelpful distraction,” adding that the company is reviewing his submissions for its board. 

Hexo declined to answer a list of questions submitted by Yahoo Finance Canada. 

“We have welcomed an open and constructive dialogue with Mr. Arviv over the past months,” Hexo’s statement reads in part. “It is disappointing that Mr. Arviv has decided to proceed with this unnecessary, disruptive and expensive approach, rather than continuing working with the company in a normal course.”

Hexo is expected to announce its own recommendations for the company’s board in the coming days.

‘A gem in Canada’

When Hexo announced its deal to acquire Redecan in late-May, analysts covering the stock were quick to praise the transaction. BMO Capital Markets analyst Tamy Chen wrote that “Redecan is a gem in Canada” in a May 28 note to clients, highlighting its strength in the pre-rolled joints category.

“They (the Redecan owners) thought that it was a good time to join up with one of the bigger LPs on the capital markets side, take some money off the table, and have the opportunity to become a global player on a much larger scale,” Arviv said.

“Aphria was merging with Tilray (TLRY.TO)(TLRY). So they didn’t have the interest at that time in doing a deal. Canopy (WEED.TO)(CGC) shot it down immediately. We reached out to them through a banker, and they said, ‘No, not interested.’ And Aurora (ACB.TO)(ACB) was more or less fire-selling assets for survival… the only other opportunity really at that time was Hexo.”

As the two sides worked towards a deal, Arviv claims St-Louis became “very aloof” and “very difficult to communicate with.” 

Arviv and the Redecan owners were then “blindsided,” he says, by the announcement of a US$145 million underwritten public offering in August, shortly before the deal was set to close. He says talk of additional financing prompted him to call for St-Louis’ resignation in a letter to the company’s board.

“What they did was guarantee that the dilution would be punitive,” Arviv said. “For the Redecan people, they destroyed $475 million of equity value.”

Arviv says he regrets his role in arranging Redecan’s deal with Hexo, believing the company would have been more successful had it been taken public on its own. 

Now, his primary concern is Hexo’s management issuing more shares or splitting the stock ahead of the March 8 annual meeting, moves he says would further destroy shareholder value.

“I’m here to win,” he said of the upcoming vote on his slate of board nominees. “I’m not playing games.”

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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