Insights

Why Sundial Growers Stock Grew 12% Today

What happened

Shares of Sundial Growers (NASDAQ: SNDL) grew 12.3% taller on Tuesday (as of 1:30 p.m. ET) after the Canadian cannabis company announced that it has submitted a “stalking horse bid” to acquire insolvent Hexo (NASDAQ: HEXO) subsidiary Zenabis Global for an undisclosed sum.

So what

Hexo owns Zenabis, having acquired the company last year for $235 million Canadian dollars ($181.87 million). Prior to that happening, however, Sundial had loaned Zenabis CA$58.9 million in December 2020, the bulk of which remains outstanding.    

Last week, Zenabis filed for creditor protection under Canada’s Companies’ Creditors Arrangement Act (CCAA), similar to a U.S. company filing for a Chapter 9 bankruptcy in order to restructure its operations and then continue in business. As part of this creditor protection process, Sundial says it offered to acquire Zenabis’ “380,000 square foot indoor growing facility located in Atholville, New Brunswick with an annual production capacity of approximately 46,000 kgs of dried cannabis” and a  “decommissioned 255,000 sq. ft. indoor facility in Stellarton, Nova Scotia” that Zenabis formerly used for cannabis packaging and processing.  

Sundial did not state how much it has offered to pay for these assets, however, and the bankruptcy court has not yet officially approved its bid. Basically, at this point all Sundial has done is suggested a sort of floor price against which other bidders can now bid to beat its offer.

Now what

Of course, if no other bidders appear, there’s the possibility that Sundial will in fact gain control of Zenabis, wresting the subsidiary away from Hexo. What would that mean for Sundial?

Well, Sundial notes that Zenabis generated about CA$11.1 million in sales for Hexo last quarter. Added to Sundial’s $44.4 million in sales last year, that could potentially result in Sundial growing its annual sales by 77% should it come to control Zenabis in its entirety.  

Or another way to look at it: Sundial says around CA$108 million has been invested in the Zenabis facilities it is bidding on. If Sundial bid less than CA$108 million, and its bid is accepted and no other bidders emerge to beat it, this too would work out to be a good deal for Sundial.

Personally, I don’t see Hexo letting that happen. If Sundial looks to be getting too sweet of a deal, chances are Hexo will simply offer more money to save its subsidiary from falling into Sundial’s hands. For now, however, Sundial investors seem to be betting that this will all work out they way they’d like it to — and that’s why Sundial stock is going up.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends HEXO Corp. The Motley Fool has a disclosure policy.

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