U.S.-listed shares of Hexo Corporation tumbled as Tilray Brands plans to buy the fellow cannabis company in an all-share deal worth about US$56 million, with an offer price less than the stock’s market value prior to the announcement.

Tilray’s implied purchase price in the so-called takeunder deal is US$1.25 per share, less than Hexo’s Monday closing price of US$1.64. On Tuesday, Hexo plunged 27 per cent to US$1.20 — paring Monday’s 30 per cent rally, which was triggered by a media report implying that Tilray would buy the company for US$75 million. 

“The deal is at a discount and with room for material upside on value creation,” Jefferies analyst Owen Bennett wrote in a research note.

Tilray, one of Canada’s largest cannabis producers, is teaming up with the smaller rival as consolidation of marijuana companies continues. It had previously bought US$173 million in Hexo’s debt at a discount, which analysts had said could push the two companies together.

“Takeunders are rare, but they happen,” said Tyler Silver, a merger-arbitrage focused partner at Apex Capital Holdings. It sometimes happens when the market bids up the stock on deal rumors but the actual purchase price is lower than what people are expecting. In other cases, companies agree on these terms if future prospects of the merger is better for them than running the company as a standalone, Silver added.

Still, Wall Street analysts are positive about the deal’s strategic rationale. Canadian cannabis remains tough and consolidation should help, according to a Cowen note. “The Hexo deal should not come as a surprise to investors as the companies established a collaborative framework on cultivation, production and packaging last year,” analysts including Vivien Azer wrote in a note.  

Hexo once had a joint venture with Molson Coors to produce CBD drinks, but the companies parted ways. It also announced a deal last September to make products for Tyson 2.0, a cannabis company co-founded by Mike Tyson, the former professional boxer.