Group opposes ‘fire sale’ of troubled cannabis retailer Fire & Flower

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Customers at Fire & Flower on the first day of legal adult-use cannabis sales in Canada in 2018

Fire & Flower was riding high on Oct. 17, 2018, when legal adult-use cannabis sales began in Canada. (Photo by Kelsey McMillan)

A syndicate of parties including the second-largest shareholder of Fire & Flower Holdings Corp. is opposing a proposed stalking-horse agreement between the cannabis retailer and its largest shareholder, an affiliate of convenience store operator Alimentation Couche-Tard.

Fire & Flower entered bankruptcy protection earlier this month.

In an affidavit filed with the Ontario Superior Court of Justice, the major shareholder, Shawn Dym, called the proposed sale and investment solicitation process (SISP) “truncated” and a “fire sale.”

“I believe that (Fire & Flower’s) underlying business is strong and that a fire sale at this time is not necessary and not in the best interests of all stakeholders,” Dym wrote.

Dym is co-founder and director of Green Acre Capital Fund II (Canada), which owns approximately 5% of the outstanding common shares of Fire & Flower Holdings. He is Fire & Flower’s No. 2 shareholder.

The syndicate opposing the Couche-Tard SISP also includes real estate firm Osmington and investment firm Sharno Group as well as Shalcor Management. All three entities are based in Toronto.

Fire & Flower, also headquartered in Toronto, was granted creditor protection in early June under the Companies’ Creditors Arrangement Act (CCAA), allowing the company to maintain the status quo and consult with stakeholders with a view to continuing operations.

The company, one of the largest cannabis retailers in Canada, had accumulated significant net losses of more than 200 million Canadian dollars ($151 million) since 2018.

Couche-Tard’s involvement

Couche-Tard is Fire & Flower’s senior secured creditor, unsecured creditor, debtor-in-possession lender, shareholder and proposed stalking-horse bidder.

On June 14, the Couche-Tard affiliate disclosed that it had negotiated a stalking-horse agreement with Fire & Flower.

The designation could position Couche-Tard as the initial bidder for Fire & Flower’s assets.

The agreement would kick in only if no satisfactory bid was selected in the first phase of the SISP, at which point Fire & Flower would seek court approval of the stalking-horse agreement with the Couche-Tard affiliate.

However, the syndicate argues the deal isn’t in the best interest of Fire & Flower or its investors and will not maximize stakeholder value.

On June 19, Green Acre pitched a new debtor-in-possession (DIP) facility to replace the existing DIP facility by the affiliate of Couche-Tard.

That proposed DIP deal, financed by the syndicate of lenders, would advance to Fire & Flower up to CA$9.8 million, which is the same amount as the Couche-Tard affiliate’s.

The terms of the newly proposed DIP facility are similar to the Couche-Tard DIP agreement but offers a lower interest rate (10% versus 12%) and a lower exit fee (CA$300,000 versus CA$400,000).

Crucially, the proponents say it would enhance the prospect of successful restructuring Fire & Flower and the chances of a plan of arrangement, “which possibility is foreclosed under the Couche Tard DIP Facility Agreement.”

W. Brett Wilson, an investment banker who had been on the CBC TV business show “Dragons’ Den,” is among those on Green Acre’s leadership team.

In his affidavit, Dym argues that the proposed SISP and stalking-horse agreement are the culmination of a “loan to own” strategy devised by Couche-Tard.

“In short, I believe that, if the applicants’ proposed SISP and stalking horse agreement are approved, Couche Tard is likely to become the sole owner of (Fire & Flower) in about a month from now for no cash consideration, with all subordinate debt and equity interests wiped out,” Dym’s affidavit contends.

Rival sought to buy assets

The latest court documents also reveal that, in the days leading up to the bankruptcy protection filing, Fire & Flower received a letter of intent from rival Canadian marijuana retailer Pop’s Cannabis Co. for the purchase of up to 32 stores.

According to the nonbinding term sheet contained in the court filings, Pop’s offer was worth CA$20 million.

“I understand that (Fire & Flower) did not meaningfully engage with Pop’s Cannabis following receipt of the Pop’s Offer,” Dym wrote in his affidavit.

“At my urging, the chairman of (Fire & Flower’s) board spoke to one of the principals at Pop’s Cannabis but negotiations were not opened, and a formal response was not provided.”

The affidavit also notes that Fire & Flower’s market capitalization peaked at around half a billion dollars in February 2021 when its shares traded at roughly CA$15.

On the day of Fire & Flower’s CCAA filing, its shares had fallen to around CA$0.29, giving it a market capitalization of approximately CA$13 million.

“As such, it is obvious that, absent a true financial restructuring as opposed to sales process, thousands of retail shareholders will lose the entirety of their investment alongside Green Acre and millions of dollars of shareholder value will be destroyed,” the Dym affidavit notes.

Fire & Flower shares trade as FAF on the Toronto Stock Exchange.

Matt Lamers can be reached at matt.lamers@mjbizdaily.com.