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What do the Edmonton Oilers have in common with Canada's latest multimillion-dollar pot deal? More than you think. Sundial Growers Inc. made waves earlier this week when it announced a deal to buy Inner Spirit Holdings Inc., Canada's biggest pot retail chain with 86 Spiritleaf stores across the country, for about $131 million. The deal puts the Alberta-based company in a rare group that includes Canopy Growth Corp. and Decibel Cannabis Company - a cannabis producer that will also own a major retailer. It also will help to cement Sundial's presence in Ontario, the country's largest cannabis market, while ensuring its products get prime billing within Spiritleaf's store network. There are 28 Spiritleaf stores that operate in the province but have been structured to allow a producer like Sundial to own them despite ownership restrictions set by the province's cannabis retail regulations. Ontario's pot shop regulations essentially limit the number of stores one entity can own to 30 (which will increase to 75 in September) while also capping the ownership stake a cannabis producer can own in a retailer to no more than 25 per cent of voting control in the company. However, the Ontario regulations do allow for a franchise model to be implemented in the cannabis retail space, providing a window of opportunity for pot producers to capture a greater piece of the pie in the province. Inner Spirit does have a handful of corporate-owned stores in Ontario which would need to be divested to appease regulators before the deal closes. "If you're a licensed producer, and you want to own a retail brand that has a presence in Ontario, you really need to be looking at a franchise," said one cannabis retail expert who declined to speak on the record because they were involved in the Sundial deal. That model is largely borrowed from a similar strategy employed by Canopy Growth with the Katz Group, one of Canada's largest privately-owned enterprises and the owner of the NHL's Edmonton Oilers. The two have an exclusive licensing agreement where the Katz Group is a master franchisee for the Tokyo Smoke brand in Ontario and owns and operates the stores under its license. That agreement also franchises out the Tokyo Smoke brand to franchisees, who own their stores to remain in full compliance with the Ontario retail regulations. "Our goal is to be the number one retail cannabis brand in Canada. Our strategy, much like we did with our pharmacy business, is to expand into several other provinces," said Katz Group spokesperson Tim Shipton in an interview. As a result of the agreement between the two, Canopy Growth does not own any of the franchised Tokyo Smoke stores in Ontario either directly or indirectly. "The Katz Group has an incredible track-record of operating responsibly in a highly regulated industry. We are proud to partner with them to grow the Tokyo Smoke retail banner across Ontario," said Grant Caton, general manager of Canada for Canopy growth. For now, the regulations will continue to allow a franchise model to flourish in Ontario and await the next cannabis producer willing to invest in a retailer, but the government is keeping a close eye on how the market will play out. A spokesperson from the Ontario Attorney General's office said the provincial government will "continue to monitor the cannabis retail landscape and explore changes under Ontario’s open cannabis market if they become necessar |