Sundial Growers Inc (NASDAQ: SNDL) is headed for the top in the market this morning, and for good reason. The company announced that it has completed a financial restructuring, resulting in a debt-free status. Here’s what’s happening:
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- Sundial Growers Announces Debt-Free Status
- Management Commentary
- Is an Acquisition Still Possible?
- Risks to Consider Before Buying SNDL Stock
- Final Thoughts
Sundial Growers Announces Debt-Free Status
As mentioned above, Sundial Growers is climbing in the market this morning after announcing the completion of a financial restructuring which resulted in the company achieving debt-free status.
The debt-free status was ultimately the result of the prepayment of remaining outstanding principal under its senior secured, non-revolving, term credit facility of $21.9 million.
Following the financial restructuring, SNDL now has an unrestricted cash balance of C$62 million and outstanding common shares of 840 million. The prepayment of the credit facility will result in a reduction in annual interest costs of about $3.6 million. Moreover, the move removes all covenants and restrictions on the Company’s ability to pursue strategic opportunities.
In a statement, Zach George, CEO at SNDL, had the following to offer:
While many cannabis companies have significant debt burdens, Sundial is proud to announce that we are now debt-free. In February 2020, the global pandemic was just emerging, Sundial was running out of cash just two quarters after its IPO, and we were in breach of covenants under the terms of our senior secured credit facility. Through a combination of asset sales, debt for equity swaps, capital raises, and cash repayments, we have eliminated $227 million in debt this year. Our financial restructuring is now complete, enabling us to bring greater focus to what really matters – delighting consumers.
Is an Acquisition Still Possible?
Recently, those who have been following SNDL stock have been hoping for one thing, an acquisition. A few months ago the company announced a strategic alternatives exploration, which included the potential sale of assets, or the entire company.
With the financial restructuring news, many are wondering if an acquisition is still a likely result.
In my opinion, the answer is a resounding yes.
The fact of the matter is that this deal seems to be aimed at making strategic alternatives possible, while improving the balance sheet for the company, SNDL said the transaction “removes all covenants and restrictions on the Company’s ability to pursue strategic opportunities.”
So, for those of you wondering why a deal hasn’t happened yet, you may have your answer.
Nonetheless, I stand by my opinion that Sundial Growers represents a compelling acquisition opportunity for the big players. Ultimately, regulatory changes are happening around the world. However, due to the somewhat taboo nature of the cannabis industry, it is a largely fragmented one.
It’s at this stage of the game that the big players need to act quickly in an attempt to consolidate a fragmented market in order to take it by storm.
At the same time SNDL represents a great opportunity. The stock hasn’t done well this year, meaning that a suitor will receive a pretty steep discount. At the same time, its activities in the vape and edibles subsectors of the larger cannabis sector will likely be attractive as these products are gaining steam in terms of demand.
All in all, this announcement isn’t one that suggests a deal is off. It’s one that suggests that a SNDL acquisition may be just around the corner.
Risks to Consider Before Buying SNDL Stock
If you’re investing, you’re accepting risk. There’s no question about it.
This is true with all stocks including SNDL stock. In particular, before buying SNDL, investors should consider the following risks:
- A Deal May Not Happen. First and foremost, investors are excited about a potential acquisition, which is a highly speculative concept. At the end of the day, nobody can see into the future, and there’s a chance that a deal will not happen. Should this be the case, some investors will likely leave their positions, resulting in declines.
- Capital Risk. The transaction left quite a bit of money on the balance sheet, but it’s important to remember that Sundial Growers operates at a loss. Should the funding on its balance sheet not be enough to get it to profitability, dilution may be the result as the company looks to capital markets as a fundraising opportunity.
- Regulatory Risk. Much of the excitement surrounding the cannabis sector has to do with coming regulatory changes. We’ve seen movement in the positive direction in the UK, in some areas of Europe, and most importantly, in the United States. However, moves in the positive direction don’t mean the finish line has been crossed yet. Should regulatory movements start going in the other direction, SNDL stock, along with others in the cannabis sector will feel the pain.
The bottom line here is simple. The announcement made by Sundial Growers this morning was an overwhelmingly positive one. At the moment, the company is seeking strategic alternatives, including the potential sale of the company. Today’s announcement will help the company reach that goal in two ways:
- Restriction Removal. There are no longer any restrictions on the company that would hold it back from making a potential deal.
- Debt-Free. If you were a suitor, would you want to buy a company with a mountain of debt? SNDL no longer has that issue. With the announcement today, the company is in debt-free status. As such, it likely just increased demand for an acquisition in a big way.
All in all, I’ve been interested in following SNDL stock. However, with today’s announcement, I’m strongly considering buying it. It looks like the stars are aligning perfectly for compelling gains ahead.