Canadian cannabis companies SNDL, Nova to amend complex retail deal

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Canadian cannabis producer SNDL and retail operator Nova Cannabis are amending a previously announced deal in which SNDL will transfer stores to Nova and return shares to the retail company for cancellation, among other things.

SNDL, headquartered Calgary, Alberta, is the majority shareholder of Edmonton, Alberta-based Nova after SNDL acquired Nova’s previous parent company Alcanna.

“Overall, the amended terms aim to increase the number of retail stores SNDL will vend into Nova Cannabis (by an additional six locations) while reconfiguring SNDL’s equity ownership in Nova,” Matt Bottomley,  an analyst for Toronto-based Canaccord Genuity, wrote in a Tuesday research note summarizing the amended deal.

The multifaceted deal between SNDL, formerly known as Sundial Growers, and Nova was announced in December 2022.

The arrangement originally involved SNDL transferring 26 cannabis stores to Nova while retaining a management- and administrative-services deal with the retailer, replacing a credit facility and returning 14.3 million Nova shares to Nova for cancellation.

Also under the original deal, SNDL would have cut its ownership of Nova to less than 20% via a capital distribution of SNDL’s Nova shares to SNDL shareholders.

The terms of the amended deal announced late Monday include:

  • Nova will now acquire a total of 31 stores from SNDL, including 12 in Alberta, 11 in Ontario, three in British Columbia, three in Saskatchewan and two in Manitoba.
  • The number of Nova shares to be returned by SNDL to Nova for cancellation will be significantly reduced to roughly 2 million.
  • SNDL will increase the number of Nova shares being distributed in the capital distribution to SNDL shareholders so that SNDL holds no more than 19.9% of Nova’s shares.

“As a result of SNDL’s ownership in the Nova Shares being reduced below 20%, Nova will be permitted to directly own and operate cannabis retail stores in Ontario and British Columbia, in accordance with applicable laws,” Nova noted in a news release.

Other aspects of the amended deal include:

  • Nova’s revolving credit facility of 15 million Canadian dollars ($11.2 million) from SNDL “is to be eliminated by way of capital contribution by SNDL, which is expected to be fully drawn by Nova at the time of closing.” SNDL will lend Nova a new CA$15 million revolving credit facility with a possible CA$10 million accordion.
  • SNDL will agree not to “demand repayment of, or take any action relating to, any amounts drawn by Nova on the existing credit facility between Nova and SNDL prior to June 30, 2023, except in connection with circumstances” that would have “a material adverse effect” on Nova.
  • SNDL will continue to provide management and administrative services to Nova with a three-year fee holiday, after which Nova will pay SNDL CA$2 million annually.
  • SNDL will receive the intellectual property related to Nova’s Value Buds discount retail brand.
  • Licensing agreements will see Nova use SNDL’s retail banners (Value Buds, Spiritleaf and Superette) in exchange for an annual fee.
  • Nova will also grant SNDL “certain nomination rights to the Nova board.”

The amended deal is subject to stock exchange and shareholder approvals.

Shares of SNDL trade on the Nasdaq; Nova trades as NOVC on the Toronto Stock Exchange.

Nova said it expects the deal to close before the end of June.

Last week, Nova reported an annual net loss of CA$11.2 million, with improving revenue and gross sales compared to the previous year.

On Monday, SNDL announced it had been granted a management cease-trade order “due to an expected delay” in filing its financial statements for 2022.