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On the back of a somewhat complex deal with one of its business partners, SNDL‘s (SNDL -2.64%) stock bumped up higher on Wednesday. When the smoke cleared, the Canadian marijuana company’s share price had closed 1% above Tuesday’s level.
SNDL and that partner — retailer Nova Cannabis (NVAC.F -6.29%) — jointly announced a “transformational strategic partnership” that morning.
What it transforms is the existing relationship between the two companies. In their words, SNDL will “vend” its 26 dispensaries (plus accompanying intellectual property rights) to Nova. Meanwhile, the latter company will hold the right of first refusal to SNDL’s retail pipeline in the Canadian market.
The two companies have also modified their management and administrative services agreement. Under the new pact, Nova will pay no fees to its partner for a period of three years. After this, the annual fee for such services will be $2 million. The two companies said this is a relatively low rate, given how costly these expenses would be if Nova were to incur them in-house.
In terms of finances, SNDL will eliminate a 15 million Canadian dollar ($11 million) revolving credit facility. This is expected to be fully drawn at the closing of the deal. With the closing, Nova will receive around CA$5.5 million ($4 million) from it.
The companies added that SNDL will advance a new, CA$15 million credit facility with a CA$10 million ($7 million) accordion feature. Finally, SNDL will reduce its equity holding in Nova to under 20%.
In an investor presentation on its website, Nova said that its new deal with SNDL puts it in a position “to become a low-cost, well-capitalized cannabis retailer at an attractive valuation.” Conversely, it shifts SNDL away from the retail segment, hence the cautiously optimistic investor reaction.
Marijuana retail is a tough game with many challenges, not least of which is heavy competition and the persistence of the black market. This holds true especially in Canada.
Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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