May 5, 2021
Sundial to buy Inner Spirit in $131M deal as pot shop M&A heats up
Ontario Cannabis Store accepting fewer shipments to hurt pot producers
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Sundial Growers Inc. is buying Inner Spirit Holdings Ltd., Canada's biggest chain of licensed legal cannabis stores, in a cash-and-stock deal valued at $131 million, the companies said Wednesday.
The deal is just the latest move in the Canadian cannabis retail space as more companies look to consolidate the highly competitive and fragmented market. There are over 1,600 licensed legal cannabis stores across Canada, with analysts expecting that figure to climb above 2,000 by the end of the year.
Sundial will pay $0.30 in cash and 0.0835 of its common shares for each share of Inner Spirit, which controls a network of 86 legal pot stores across Canada under the Spiritleaf brand. The purchase price - valued at approximately $0.39 for each Inner Spirit share - represents a 62.5 per cent premium to the retailer's Tuesday closing price.
The deal adds to the recent list of acquisitions the Calgary-based cannabis producer has made over the past several months, including announcing it acquired more than 10 per cent of Valens Co., a pot extraction and distribution company, as well as a $22-million investment into Indiva Ltd. for an 18.45 per cent stake in the edibles maker.
To help fund its recent investment strategy, Sundial recently announced several registered offerings in February that raised a total of US$218 million – despite significant share dilution – while filing a shelf registration that would see the company raise an additional US$1 billion. That capital raise came following fourth-quarter results that showed Sundial booked a US$64 million loss on just US$13.8 million in net revenue while ending the period with US$60.4 million in cash.
"Sundial becomes a stronger and more diverse cannabis company by acquiring Inner Spirit and the Spiritleaf retail store network," said Zach George, chief executive officer of Sundial, in a statement. "Sundial's capital base will enable us to support continued expansion and deepen the capabilities of the Spiritleaf retail brand."
RBC Capital Markets Analyst Douglas Miehm said in a report to clients Wednesday that the deal should help Sundial sell more of its products within Spiritleaf stores, potentially providing market share and margin benefits.
"This should provide immediate revenue [and] EBITDA upside for Sundial, and potential for the company to expand distribution of its own products. Sundial had previously stated that it would consider potential M&A [and] investments in cannabis companies as strategic alternatives," Miehm said.
Inner Spirit shareholders will vote on the deal during a special meeting in July. The deal also comes with a provision that allows Inner Spirit to accept a better offer for the company while giving Sundial a window of five business days to match that proposal.
Canada's cannabis retail market has experienced a wave of consolidation in recent months. Alcanna said it would spin off its pot shop business in a merger with YSS Corp. in a $130 million deal in January, while High Tide Inc. acquired rival Meta Growth Corp. in August to create the country's biggest retailer, and Fire & Flower Holdings Corp. bought Toronto-based Friendly Stranger Holdings Corp. in November.
