The deal has been approved by the boards of both companies and will be put to Zenabis shareholders at a special meeting. Zenabis will face a C$6 million termination fee if the deal is called off.

Once the deal has closed, Hexo shareholders will own 87.43% of the combined company and Zenabis shareholders will hold the remaining 12.57%.

Read: Cannabis stocks nosedive as rally driven by hopes for U.S. legal reforms comes to a screeching halt

The new entity will be a top three licensed producer in Canada’s legal recreational market by sales. It will also offer Hexo a foothold in the European medical cannabis market via Zenabis’ local partner in Malta, with an established facility supplying pharmaceutical products to the European Union market.

The companies are expecting the deal to generate annual synergies of about C$20 million within one year of closing. Hexo will have an additional two indoor grow facilities of about 635,000 square feet, and access to a 2.1 million sq. ft. greenhouse facility, for a total of about 2.735 million sq. ft.

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“We are proceeding with this transaction because we believe it should be accretive for our shareholders, and it also positions HEXO for accelerated domestic and international growth while supporting near-term requirements for additional licensed capacity,” Hexo Chief Executive and co-Founder Sebastien St-Louis said in a statement.

Jefferies analyst Owen Bennett said that while the deal shouldn’t surprise, given recent moves by Hexo to consolidate its stock and looks to be accretive, “we do wonder if this has been overly driven by short termism, and from a strategic perspective it does not really get us excited.”

In the Canadian market, Hexo is not acquiring any brands of value, and Zenabis’s main brands are value/discount, as are Hexo’s. The addition of a European presence while broadly positive, is really just a joint venture, Bennett wrote in a note.

“We think Hexo would have been much better placed looking to do something in the US. After all, it is US optionality which will be critical to maintaining current Canadian sector multiples, not Canada and Europe,” he wrote.

Jefferies rates Hexo at underperform.

The deal comes after two recent transactions that made a splash., the Feb. 4 news that GW Pharmaceuticals Ltd.
GWPH,
-0.20%,
the first company to win U.S. Food and Drug Administration approval for a cannabis-based drug, is being taken over by Jazz Pharmaceuticals PLC.
JAZZ,
-0.61%
in a $7 billion deal. That came after the December announcement of a $3.9 billion reverse merger deal between Tilray Inc.
TLRY,
+19.41%
and Aphria Inc.
APHA,
+28.28%

APHA,
+27.61%,
to form the world’s biggest cannabis company measured by revenue.

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It also comes after a broad-based rally in the cannabis sector spurred on by the new U.S. administration with President Joe Biden viewed as in favor of reforming the U.S.’s strict cannabis laws, which continue to classify the plant as a Schedule 1 drug, alongside heroin.

That classification has hampered the development of the sector, which is confined to those states that have legalized cannabis for medical or recreational use and kept companies mostly locked out of the federally insured banking system and capital markets. A change in the law is expected to free up capital and bring many new investors to the space.

See: New York is finally expected to legalize cannabis in 2021 as Gov. Cuomo goes all in

Senate Majority Leader Chuck Schumer has pledged to make reform a key part of the current Congress. While most Canadian companies are unlikely to profit from U.S. legalization immediately, it will greatly expand the legal market and the stocks have been swept up in the euphoria.

Read now: Cannabis stocks rally after Chuck Schumer leads drive for reforms that may end federal prohibition

Shares of both companies were higher on the news. Hexo was up 14.6%, while Zenabis was up about 10%.

The Cannabis ETF
THCX,
+5.70%
was up 5% and the S&P 500
SPX,
-0.06%
was flat.