Stockwatch article Nova & SNDL
Cannabis Summary for Dec. 21, 2022
2022-12-21 20:02 ET - Market Summary
by Stockwatch Business Reporter
The S&P/TSX Cannabis Index added a fraction to 33.98, while the CSE Composite Index lost a fraction to 194.83. With mixed success, U.S. cannabis stocks tried to bounce off the lows of Monday and Tuesday, set after Congress dashed hopes -- yet again -- of enacting cannabis banking reform.
A mournful mood hung over the sector. "We are deeply disappointed," read a statement on Twitter from Kim Rivers, chief executive officer of Trulieve Cannabis Corp. (TRUL). Executive chairman Boris Jordan of Curaleaf Holdings Inc. (CURA) echoed her comments, calling the setback "incredibly disappointing ... [and] a failure by our government." Both stocks extended their trips down today, with Trulieve losing 30 cents to $9.01 and Curaleaf losing 15 cents to $5.35. Others had better luck rebounding, such as Verano Holdings Inc. (VRNO), up 32 cents to $4.13, and Glass House Brands Inc. (GLAS.A.U), up 17 U.S. cents to $2.20 (U.S.). Over all, the AdvisorShares Pure U.S. Cannabis ETF (MSOS) eked out a 10-U.S.-cent gain to $6.86 (U.S.). It traded as high as $14.59 (U.S.) earlier this month.
On a brighter note, here in Canada, two already tight-knit companies spent today promoting a "transformational strategic partnership." Zach George's Alberta-based SNDL Inc. (U.SNDL), up two U.S. cents to $2.08 (U.S.) on 4.4 million shares, is overhauling its retail operations with the help of its majority-owned Nova Cannabis Inc. (NOVC), up 16 cents to 99 cents on 571,000 shares. The arrangement will see dozens of retail assets transferred from SNDL to Nova in exchange for a licensing deal. SNDL will also eliminate debt owed by Nova and reduce its 63-per-cent equity interest in Nova to less than 20 per cent.
For SNDL, the apparent goal is to lower its direct risk in the Canadian retail market. SNDL currently has 26 corporate-owned stores under the Spiritleaf and Superette banners (plus another 75 franchised Spiritleaf stores) and another 85 stores under Nova's Value Buds banner. SNDL will now transfer the 26 corporate-owned stores to Nova, trading the volatility of store-level profits for slightly more predictable licensing fees. As well, it will take a big step back from control over Nova's stores. First it will return 14.3 million of its 35.7 million Nova shares to Nova's treasury (reducing its interest to 37 per cent), and then it will distribute an unspecified chunk of Nova shares to SNDL's shareholders (taking its interest somewhere below 20 per cent).
Nova, for its part, is keen to expand both its "world-class cannabis retail platform" and the liquidity of its shares. It is also pleased that SNDL has agreed to eliminate $15-million in debt owed by Nova. (The current balance is actually only $9.5-million, but Nova plans to draw down the remaining $5.5-million as soon as feasible.) As well, Nova will get a three-year holiday from fees owed to SNDL under a management services agreement. This agreement will remain in place, which according to Nova is one of the greatest delights of all. It heaped praise upon SNDL for remaining such a steadfast supporter and "allow[ing] Nova to remain laser-focused on growth and profitability." (The laser has yet to hit its mark: In the third quarter, Nova lost $1.5-million on sales of $58.9-million.)
Shareholders of Nova seem intrigued. They will have to give their approval of the deal at a special meeting, which Nova expects to hold in May. The companies hope to close the deal shortly thereafter.