Sun’s Out, Guns Out

• $130.223M Market Capitalization

Sundial Growers Inc. (SNDL.Q) announced today that it has entered into a purchase agreement pursuant to which the shares of Zenabis Global Inc., along with its business, assets, and indirectly wholly-owned subsidiaries, will be acquired by Sundial. It should be noted that the purchase agreement will occur in the form of a stalking horse bid. Henceforth, Zenabis Global Inc. will be referred to as Zenabis.

“We are committed to creating continuity for the Zenabis Group’s operations and employees and assisting Zenabis in good faith with its restructuring. This process has just begun, and we will provide more information as it becomes available,” said Zach George, CEO of Sundial.

Here’s your fun fact of the day. The term “stalking horse” first originated in the 16th century. The term was originally associated with horses that were trained for hunting wildfowl. Typically, wildfowl would flee at the sight of humans. On the other hand, birds were more tolerant in the presence of other animals, such as horses. With this in mind, hunters would slowly approach wildfowl with their horses.

Their upper bodies were hidden by the “stalking horse,” which allowed hunters to get within firing range without scaring off the flock. Thus, the term stalking horse was born. So, how does this apply to modern-day investing? Today, a stalking horse bid refers to an initial bid on a bankrupt company’s assets. The initial bid is set at the low end, preventing other bidders from underbidding the purchase price.

To summarize, this allows a distressed company to avoid receiving low bids for its final assets. In the case of Sundial and Zenabis, the Company’s initial bid will be set at the minimum acceptable value. This is intended to generate the best offers for Zenabis’ business and assets. Keep in mind that HEXO Corp. (HEXO.T) owns Zenabis, following the closing of an arrangement on June 1, 2021.

HEXO acquired Zenabis, one of its competitors, for CAD$235 million. Just a year later, on June 17, 2022, Zenabis announced that it had filed for creditor protection under Canada’s Companies’ Creditors Arrangement Act (CCAA). For context, the CCAA refers to a federal law allowing corporations that owe their creditors in excess of $5 million to restructure their business and financial affairs.

The Whole Pie

Needless to say, when it comes to distressed companies, Zenabis fits the bill. Sundial’s bid agreement is subject to the approval from the Quebec Superior Court supervising the CCAA proceedings, and to potential alternative bids pursuant to bidding procedures, which will be sought on July 5, 2022. So, what’s in it for Sundial? Let’s talk about Zenabis’ assets.

The assets covered in the bid agreement include Zenabis’ 380,000 square foot indoor growing facility in Atholville, New Brunswick. The facility has an annual production capacity of approximately 46,000 kilograms (kg) of dried cannabis and 15,000 kg of extraction capacity. The company’s facility has also received EU GMP certification, enabling international export to Israel, Malta, the United Kingdom (UK), and the EU.

In terms of bells and whistles, Zenabis’ Atholville facility utilizes a fully computerized monitoring system, the latest HPS and LED lighting technology and seed-to-sale tracking systems. Moreover, the facility is capable of growing multiple strains, with an extensive library of strains currently under trial, which would be added to Sundial’s current portfolio.

Furthermore, Zenabis has established a Joint Venture (JV) with ZenPharm Limited, which is based in Malta, allowing for commercial bulk imports into Malta from Zenabis’ Atholville facility. Additionally, this enables the subsequent exports of finished medicinal cannabis products to countries in the EU and UK.

Lastly, the bid agreement includes a decommissioned 255,000 square-foot indoor facility in Stellarton, Nova Scotia. This facility was previously used as a packaging, processing, and value-added cannabis product manufacturing facility. Combined, Sundial estimates that the total capital invested in both the Atholville and Stellarton facilities to date is an estimated $108 million.

As for performance, according to HEXO’s publicly filed financial statements and MD&A, Zenabis contributed $11.1 million towards the company’s consolidated net revenues in Q2 2022. In total. Zenabis’ international net revenues consisted of 54% of HEXO’s overall international net revenues, representing an increase of 91% when compared to the prior quarter.

In December 2020, Sundial acquired a special purpose acquisition vehicle, which owned $58.9 million of the aggregate principal amount of senior secured debt of Zenabis. The loan pays interest at a rate of 14% a year and matures on March 31, 2025. Moreover, Zenabis is also subject to pay Sundial a royalty based on quarterly sales from its medical, recreational, and wholesale cannabis business.

Sundial’s share price opened at $0.2933 on June 17, 2022, down from a previous close of $0.2939. The Company’s shares were up 6.60% and were trading at $0.3133 as of 4:00 PM EST on June 17, 2022.