Well, Sundial Growers ($SNDL) – via their joint venture (JV) in Sunstream Bancorp Inc. – has made a move, albeit a small one.

You might recall $SNDL established a JV with an outfit called the SAF Group, and after initially injecting $100MM to capitalize it, increased that amount by $88MM shortly after, and earlier this month dropped another $350MM into the hat. Now packing some $538MM, it’s quite a chunk of change. The purpose of the JV is to lever “strategic financial and operational partnership to target asymmetrically enhanced risk-return opportunities in the cannabis industry to provide exposure to a portfolio of attractive debt, equity and hybrid investments:.

Yeah. $SNDL is out of the dope business and into investment banking.

They announced a deal yesterday with Clever Leaves ($CLVR), a NASDAQ listed weed company we’ve never looked at before (I’ll remedy that tomorrow probably….. I’ve another day doing research on something we hope to be able to announce soon).

Now, $25MM isn’t a lot, yet signals an approach we see fairly often in cannabis – the use of financial instruments – yet rarely at this level of complexity. I’ll break this thing down – it’s complex, and valuation is in the realm of financial engineering.

• $25MM in cash at 5% interest rate, escalator on default provisions;
• Interest paid in cash or increasing principal balance (at $CLVR’s discretion)
• 50% of the total ‘loan’ is a one year call option at $13.50
• Remaining 50% is a symmetrical 1 year American put/call at 92% of share price
• $CLVR used the proceeds to compress outstanding 2022 dated convertible debentures – claiming some $2.8MM in savings from this refinancing. I’d label it a debt roll.
• The tenor (3 years) effectively extends that debt tranche by 2 years.

Ok. I’ve spent a few minutes on this, and what I see is for that $2.8 MM $CLVR claims in savings, it cost them about $5.5MM in interest/optionality to get it. It could fairly be characterized as a debt for equity swap.

However one wants to look at it, this is what hedge funds and investment banks do – and is applied within all kinds of sectors. I’d remind the reader though that this is about as far away from selling baggies as one can get.

This looks different texturally than taking positions in Indiva or Inner Spirit or Valens – and Sunstream is apparently beginning to seek US exposure out now (the largest distinction is in the put/call) The only thing to myself that stands out is the total amount of the deal, which is modest given the margin. I’d have expected $SNDL to want to have more thrown at it.

I’d guess that either $CLVR’s financial statements weren’t able to provide the capacity (I’ll find out and report back tomorrow), or, the JV expects to go many places, and is using a reduced capital allocation approach.

Just some brief thoughts. If you’d like the skinny on $SNDL’s weed business (remember, they actually have one, albeit unviable), I recommend GoBlue’s in depth overview of it.

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative.