SNDL is divesting some of its retail portfolio by selling 26 cannabis retail stores into Nova’s cannabis retail business. The move is being made to reduce SNDL’s financial risk from its retail stores. Those stores are under the Spiritleaf and Superette banners and are located in Ontario and Alberta. Nova will also have a right of first refusal on SNDL’s Canadian cannabis retail pipeline.
When SNDL acquired Alcanna last year it also became Nova’s majority shareholder, so it is now reversing that position. It is also changing its strategy to become a large vertically integrated company. In 2021 SNDL acquired Inner Spirit, which runs the Spiritleaf franchises, and then acquired the Superette stores this year after that company filed for creditor protection.
Revising Agreement with Alcanna & Nova
The existing management and administrative services agreement between SNDL’s subsidiary, Alcanna Inc., and Nova is being amended, For the first three years following this amendment, Nova will not be paying any fees under the agreement. Following that time, Nova will pay an annual fee of $2 million, which is materially lower than the cost of building and operating the infrastructure if Nova was required to manage those services in-house.
Changing Equity & Increasing Liquidity
SNDL will eliminate a $15 million of revolving credit after Nova draws the remaining CA$5.5 million. That will be be replaced by a new $15 million credit facility, with a $10 million accordion subject to certain conditions.
Approximately 14.3 million common shares of Nova held by SNDL’s holdings will be returned to Nova’s treasury for cancellation. The parties allocated a value of $7.5 million to the cancellation of Nova’s shares with the number of shares calculated based on a price of $0.526.
SNDL plans to reduce its equity ownership in Nova to below 20% through a capital distribution of Nova Shares, owned by SNDL, to SNDL shareholders in order to increase liquidity. This will improve Nova’s balance sheet and enable the company to scale its operations with direct ownership of cannabis retail stores in Ontario and British Columbia.
“The Transaction provides Nova with a unique opportunity to further transform the cannabis retail market in Canada and enhance its business in a material way to the benefit of all our shareholders,” says Anne Fitzgerald, lead independent director of Nova. “A special committee of independent directors of Nova has completed an extensive due diligence process including the advice of independent financial advisors and has concluded that the Transaction is fair from a financial point of view to Nova shareholders. The support of SNDL, both operationally and financially, allows Nova to remain laser-focused on growth and profitability.”
A Strategic Partnership
As consideration, SNDL will receive the intellectual property rights to Nova’s fast-growing and disruptive Value Buds banner of 88 stores and the license for Nova to operate the Value Buds, Spiritleaf, and Superette banners. Nova will pay a license fee of 5% to 15% of gross profits on each store commencing one year after the transaction is completed.
“With this strategic partnership, Nova will be well positioned to thrive and focus on growth and profitability in the coming years through this world-class cannabis retail platform,” says Zach George, Chief Executive Officer of SNDL. “SNDL will continue to support and sponsor Nova in a compliant manner while leveraging our capital base and retail M&A pipeline to improve Nova’s trading liquidity and future growth.”
This agreement is subject to the approval of the Toronto Stock Exchange and shareholders and is expected to be completed in May 2023.
Photo courtesy of Nova Cannabis.