In one of the weirder stories out of legal cannabis, Sundial ($SNDL) announced today they’re buying $59MM in paper from Zenabis. Paper that emerged from last spring’s press releases.

We’d remarked on the ‘revised’ deal for the debenture….which restated and amended a previously restated and amended debenture…..as being expensive. It had come with conditions a’plenty, and a chunk of the total was slated to bridge Zenabis until their Delta 3 asset was sold (the facility went for much less than the $13MM list price).

Now, Sundial buys the paper, assumes 32 (!) quarters of royalty payments, and now has been fully securitized by Zenabis’ assets.

Ok. So. A company with shuttered production and an apparent lack of viability in their own business model…… up and buys a whack of secured debt ($7MM in principal – the bridge for Delta 3 – is due tomorrow). On the upshot, $SNDL still has about $50MM in the bank. They also have 919MM shares outstanding. Why?

Do they need the production? Does $SNDL believe the price of the secured paper is cheaper than the assets they represent? If so, they’ve just changed the trajectory of their business model. 14% interest is a good number, but it isn’t producing and selling cannabis (at least directly).

Is $SNDL figuring on default….and converting the security into revenue …….. is this a way for $SNDL to acquire sales without the bother of going and getting them? (GoBlue told me doing this via credit default would be an ugly way to do that).

$SNDL literally bought the security of a slightly larger more diversified peer – heading into a period of headwinds for retail pricing, excess inventories, and overcapacity – the reason is important as we head into 2021.

I recently saw a paper deal come out of Heritage Cannabis ($CANN) – which announced they paid a 130 million shares for Premium 5 – an early producer of hydrocarbon extracts (60+ SKUS). Premium 5 shows 2 quarters of sales, with the last one suggesting a run rate of $20MM/yr in revenue. Sounds good? No. It was going bankrupt.

Negative margin came from outsourcing extraction (via tolling) and packaging (white label services). $CANN doesn’t have hydrocarbon facilities (a very expensive build), nor do they have automated packaging. Premium 5 will be being produced by an extractor who subcontracts extraction, and hand assembles product. Just like Premium 5 is now.

The purchase was to ‘buy’ revenue, and thus, a couple more quarters.

As M&A (and bankruptcies) accelerate, look beyond the headline. You’ll likely be seeing more deals being done at the margins. More often than not, the only thing that’s changed is in the financial statements – and not in the underlying business model.

As to $SNDL – I’d really like to have been on the wall when their Zenabis discussion was going on. Time will tell whether this is an initial move of acquisition – on the face of it – acquisition is suggested. If so, its’ a hell of a way to go about 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. The author holds no position in $SNDL or $CANN.