The big news from Sundial Growers (NASDAQ:SNDL) recently was the Oct. 7 announcement that it is buying Alcanna (OTCMKTS:LQSIF) for 346 million CAD ($277.7 million) in SNDL stock.
Alcanna is a retailer of alcohol in two Canadian provinces: Alberta and British Columbia. It has 171 locations in the two provinces. It also has a 63% equity interest in Nova Cannabis (OTCMKTS:NVACF), a Canadian retailer that operates 62 cannabis stores in Alberta, Saskatchewan, and Ontario, Canada’s most populous province.
As is the case in several Canadian provinces where the provincial government runs both the liquor and cannabis stores, the acquisition of Alcanna gives Sundial a balanced attack on the Canadian retail front. The Nova Scotia Liquor Corporation’s latest quarterly results show; it’s an excellent place to be.
While I understand the premise of the acquisition, I continue to struggle with a vision of what Sundial Growers will look like, and more importantly, stand for five or 10 years from now.
Sundial’s plan is either a genius one or an indication of just how much excess capital is sloshing around these days.
If you own SNDL stock, you better hope it’s the former and not the latter. Here’s why.
SNDL Stock and Future Margins
Assuming the Alcanna acquisition is completed, Sundial will own outright or exercise control over more than 170 cannabis stores and 171 liquor stores across Canada. That puts it in the big leagues of Canadian retail, never mind cannabis or alcohol.
For example, Aritzia (OTCMKTS:ATZAF) has approximately 68 stores across Canada, with another 33 in the U.S. Granted, their stores are pretty big, but you get the picture. The combination of Alcanna and Spiritleaf makes it a potent combination.
According to Sundial’s management, one of the positives of the deal will be the $15 million boost in EBITDA (earnings before interest and taxes) from synergies found between the two companies. When every dollar of profit counts in the cannabis industry, $15 million is a big deal.
As of Aug. 9, Sundial had 2.06 billion shares outstanding. As a result, Alcanna shareholders will get 10.69 shares of SNDL stock for each Alcanna share. Based on 36.3 million shares outstanding, Alcanna shareholders will get 388 million Sundial shares for a 15.8% ownership stake in the merged entity.
“We believe this agreement is a testament to the value created by everyone at Alcanna and will be beneficial to all of our stakeholders,” James Burns, Vice Chair and Chief Executive Officer of Alcanna, said in the press release announcing the transaction. “We have been successful at achieving customer loyalty, and operating at levels of efficiency that are industry-leading and Sundial will provide great opportunities as a larger and significantly more liquid company.”
As Sundial CEO Zach George said about the deal, it provides a consistently profitable revenue stream for the company so that it can patiently wait for some of its bets to pay off, such as its 18% stake in Indiva Ltd. (OTCMKTS:NDVAF).
The Sum of All Its Parts
In early September, I suggested Sundial Growers wasn’t worth the sum of all its parts. For example, in a very optimistic scenario, I argued that Sundial’s 2022 revenue from its retail business, its cannabis operations, and various investments would generate $252 million in revenue, split almost evenly between Spiritleaf and the rest.
Now, we’ve got to add in Alcanna’s numbers. According to Morningstar, it has trailing 12-month sales of 633.73 million CAD ($508.63 million on Oct. 25) and a net income of 89.47 million CAD ($71.81 million on Oct. 25).
Assuming sales and net income grow by 10% in 2022, the entire entity would have 2022 sales of $811.5 million. Thus, on the bottom line, virtually all of its profits would be from Alcanna.
Based on 2.45 billion shares outstanding after completing the Alcanna acquisition, Sundial’s market cap would be $1.7 billion, or about 2x 2022 sales and 24x 2022 earnings.
The Alcanna deal gives Sundial breathing room to extract value from its various investments. It also strengthens its retail operations considerably. So, a 39% premium paid isn’t an outrageous price for greater stability.
I’ve been skeptical of Sundial’s plan. And I’m still not sold on the whole Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) idea.
However, in terms of investability, there’s no denying adding Alcanna to the mix makes Sundial more investable than it was before the Oct. 7 announcement.
Should you buy SNDL stock based on the news?
If you can afford to lose 100% of your investment, the risk-to-reward just got a whole lot better, in my opinion.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
