Full Press Release Details
SNDL and Nova Cannabis Announce Transformational
Strategic Partnership Creating a Sustainable Canadian Cannabis Retail Platform
CALGARY, AB, Dec. 20, 2022 /CNW/ - SNDL Inc.
(Nasdaq: SNDL) ("SNDL" or the "Company") and Nova Cannabis Inc. (TSX: NOVC) ("Nova")
are pleased to announce that they have entered into an agreement (the "Agreement" to implement a strategic partnership
(the "Transaction") creating a well-capitalized cannabis retail platform in Canada under a vertical integration model
with SNDL's upstream capabilities.
All financial information in this press release is
reported in Canadian dollars unless otherwise indicated.
This news release constitutes a "designated news
release" for the purposes of Nova's prospectus supplement dated July 22, 2022, to its short form base shelf prospectus dated June
Pursuant to the Transaction, Nova will receive from
Retail contribution: SNDL will vend into Nova's cannabis
retail business its existing 26 cannabis retail stores under the Spiritleaf and Superette banners located in Ontario and Alberta. Nova
will also have a right of first refusal on SNDL's Canadian cannabis retail pipeline.
Corporate services: The existing management and administrative
services agreement between SNDL's subsidiary, Alcanna Inc., and Nova is being amended and restated to refresh and maintain the arrangement
with SNDL. For the first three years following this amendment and restatement, no fee shall be payable by Nova under the management and
administrative services agreement. Following the three-year fee holiday, Nova will benefit from a low-cost annual fee of $2 million thereafter,
which is materially lower than the cost of building and operating the infrastructure were Nova required to manage those services in-house.
Debt restructuring: A $15 million revolving credit facility
is to be eliminated by SNDL, which is expected to be fully drawn at the time of the closing of the Transaction. This will immediately
provide Nova with additional liquidity of approximately $5.5 million from drawing the undrawn amount ahead of closing. Further, SNDL will
advance a new credit facility of $15 million at a rate of Canadian prime plus 2.75% with a $10 million "accordion" feature to
become available under certain conditions.
Return of equity: Approximately 14.3 million common shares
of Nova ("Nova Shares") held by SNDL's holdings will be returned to Nova's treasury for cancellation. The parties allocated
a value of $7.5 million to the cancellation of Nova Shares with the number of shares calculated based on a price of $0.526, which was
the 20-day volume weighted average price of the Nova Shares on the Toronto Stock Exchange ("TSX") ending December 16, 2022,
and represents an approximate 19% discount to the close of December 19, 2022.
Increased Liquidity: SNDL plans to reduce its equity ownership
in Nova to below 20% through a capital distribution of Nova Shares owned by SNDL to SNDL shareholders. This will enable Nova to scale
its operations with direct ownership of cannabis retail stores in Ontario and British Columbia.
As consideration, SNDL will receive:
Strategic partnership: The intellectual property rights
to Nova's fast-growing and disruptive Value Buds banner of 88 stores and the license to grant Nova to operate the Value Buds, Spiritleaf
and Superette banners.
License Agreement: Nova and SNDL will enter into an agreement
pursuant to which Nova will utilize SNDL's brands' intellectual property and other intangible property in exchange for a license fee at
a rate of 5.0% to 15.0% of gross profits on each store commencing one year after the Transaction. Upon closing of the Transaction, the
license fee will be calculated based on gross profits from the 114 existing locations of the pro forma Nova platform.
Key Transaction Highlights
Creates sustainable regulated retail network in Canada:
The Agreement provides a low-cost operating platform for Nova, driven by SNDL's scale across cannabis and alcohol. Nova will benefit from
SG&A savings in the first three years of the strategic partnership through the shared services with SNDL, and will continue to benefit
thereafter through an SNDL subsidized low-cost operating structure allowing Nova to enhance its discount and market share capture strategies.
Accretive return of equity and bolstered trading liquidity:
A 25% reduction in Nova share count supports a strong re-rate opportunity concurrent with anticipated trading liquidity improvement from
SNDL's share capital distribution.
Balance sheet strength to fund growth: Nova's financial
position will be significantly strengthened on a non-dilutive basis through the elimination of debt and immediate injection of additional
Bolstering vertical integration: A strategic partnership
strengthens SNDL's command of the fastest-growing retail shelf space in Canada while de-risking store-level profitability on SNDL's financials.
Immediate free cash flow stream: SNDL will monetize its
cannabis retail investments into stable free cash flow from license fees on the platform consisting of 114 stores and a pipeline of future
locations. Furthermore, license fees have the potential to grow alongside Nova's gross margins as the portfolio matures.
Pure-play retail exposure for SNDL shareholders: A share
capital distribution of Nova Shares provides SNDL shareholders the optionality of equity exposure to a well-capitalized Canadian retail
Compliant retail structure for future scale: With SNDL's
targeted ownership of Nova to below 20%, Nova can fully leverage SNDL's extensive retail M&A pipeline with opportunities for direct
ownership of retail outlets in Ontario and British Columbia.
"With this strategic partnership, Nova will be
well positioned to thrive and focus on growth and profitability in the coming years through this world-class cannabis retail platform,"
said Zach George, Chief Executive Officer of SNDL. "SNDL will continue to support and sponsor Nova in a compliant manner while leveraging
our capital base and retail M&A pipeline to improve Nova's trading liquidity and future growth."
"The Transaction provides Nova with a unique
opportunity to further transform the cannabis retail market in Canada and enhance its business in a material way to the benefit of all
our shareholders," said Anne Fitzgerald, lead independent director of Nova. "A special committee of independent directors of
Nova has completed an extensive due diligence process including the advice of independent financial advisors and has concluded that the
Transaction is fair from a financial point of view to Nova shareholders. The support of SNDL, both operationally and financially, allows
Nova to remain laser-focused on growth and profitability."
The implementation of the Transaction is subject to
the satisfaction of a number of conditions, including, among other things, the approval of the Toronto Stock Exchange, and minority shareholder
approval of the Transaction in accordance with Multilateral Instrument 61-101 - Protection of Minority Shareholders in Special
Transactions ("MI 61-101"), as more particularly described below, and the receipt of applicable regulatory approvals,
including those of the applicable provincial cannabis regulators. The Agreement provides for, among other things, customary support and
non-solicitation covenants from Nova, including customary "fiduciary out" provisions that allow Nova to accept a superior proposal
in certain circumstances and a five-business day "right to match period" in favour of SNDL. The Transaction is expected to be
completed in May 2023.
All directors and executive officers of Nova have
entered into voting support agreements with SNDL pursuant to which, among other things, the parties have agreed to vote their Nova Shares
(if any) in favour of the Transaction.
Related Party Transaction
SNDL is considered a "related party" of
Nova, and the Transaction constitutes a "related party transaction", as such terms are defined in MI 61-101. Nova is relying
on an exemption from the formal valuation requirements of MI 61-101 in compliance with the financial hardship exemption.
Pursuant to MI 61-101, the Transaction is subject
to the approval of a majority of the votes cast by the holders of Nova Shares represented in person or by proxy at a duly constituted
meeting of the shareholders of Nova, excluding the votes attaching to the Nova Shares held by SNDL and its associates and affiliates (the
"Minority Shareholder Approval"). Nova intends to obtain the Minority Shareholder Approval at an annual and special meeting
of the Nova shareholders expected to be convened in May 2023 (the "Meeting"). Further particulars of the Transaction
will be specified in the management information circular that will be sent to Nova shareholders in advance of the Meeting, and filed on
the System for Electronic Document Analysis and Retrieval (SEDAR) under Nova's profile at www.sedar.com.
Nova's board of directors has unanimously approved
the Transaction after receiving the unanimous recommendation of a special committee of Nova's independent directors (the "Special
Committee"). Nova's board of directors has unanimously resolved to recommend that the shareholders of Nova vote in favour of
Eight Capital has provided a fairness opinion to the
Special Committee of Nova that, subject to the assumptions, limitations and qualifications set out in such fairness opinion, the consideration
to be received by Nova pursuant to the Transaction is fair from a financial point of view to Nova.
ATB Capital Markets Inc. is acting as financial advisor