SNDL (NASDAQ: SNDL) is evidently looking to gracefully exit the Canadian cannabis retail market. The firm this morning announced an arrangement with Nova Cannabis (TSX: NOVC), whom it is a majority owner of, that will see several retail-related assets transferred to the latter in exchange for a licensing deal.
The transaction will see 26 cannabis retail locations in Alberta and Ontario under the Superette and Spiritleaf banners transferred to Nova, in addition to Nova receiving a right of first refusal for SNDL’s remaining Canadian retail cannabis pipeline. The Superette locations were acquired by the company just last quarter via the bankruptcy process.
At the same time, the current management and administrative services arrangement between the two firms will see Nova charged nothing for the next three years for such services, while in year four the fee will increase to $2.0 million per annum. Certain debt is also being restructured, which is to include the elimination of a $15 million revolving credit facility, and the advancement of a new credit facility at prime plus 2.75%, which is to include a $10.0 million accordion feature.
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SNDL will also be taking a $7.5 million charge on its current equity in Nova, with the company set to return 14.3 million shares to the treasury of Nova, while its equity ownership in the company will be further reduced below 20% via a distribution to SNDL shareholders. Prior to today’s announcement, SNDL held as much as 63% ownership in Nova.
In exchange for all this, SNDL will receive the IP rights for the Value Buds banner operated by Nova, and the license to grant Nova to operate Value Buds, Spiritleaf, and Superette banners. Nova will use such IP for a license fee of 5.0% to 15.0% of gross profits of each store, which will begin 12 months after the close of the transaction.
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The transaction is expected to de-risk SNDL’s exposure to the retail cannabis market in Canada via removing the risk of store-level profitability, while at the same time creating a free cash flow stream from the license fees of 114 retail locations.
In the third quarter, SNDL saw net revenue from its cannabis retail operations of $66.2 million, with gross margins of $14.5 million, while the segment accounted for $84.8 million in losses for the firm in total. For the nine month period, the segment saw $137.2 million in net revenues, with $31.7 million in gross margins and losses of $84.6 million.
SNDL last traded at $2.06 on the Nasdaq.
Information for this briefing was found via Sedar and Refinitiv. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
