Sundial ($SNDL) briefly got WSB’d yesterday, with share volume traded ending up well north of a billion shares. Even so, they only traded the float 3x over because of existing share count:

It looks like $SNDL believes in striking while the iron’s hot, today announcing an offer on a ‘best efforts’ basis, intending to raise up to $100MM USD. Interestingly, this raise includes ‘pre-funded’ warrants. Longer-time subscribers will recall the inclusion of pre-funded warrants in a raise by Tilray ($TLRY) last spring. You can read about that raise by $TLRY here.

This is quite the move by $SNDL, piggybacking off of recent interest in their equity to head out to the street. Something Aphria’s CFO Carl Merton said in our Reddit ‘AMA’ resonates with me. He suggests that: “…the more exotic the instrument, the bigger the mess the company that is issuing it is in…”. I’m of the belief that $SNDL is in a mess. Not the same mess as other’s mind you…they do have $100MM in cash (assuming they get paid back the $60MM CAD they spent trying to end-run a takeout of Zenabis ($ZENA)). No, the mess they are in is having a weed company that’s deployed more than $400MM, has $120MM in a grow op that’s largely been shuttered…..and……no real sales to support it. That’s a mess too, even with the cash they’re packing.

As to the raise, $0.75 USD will get the buyer a choice of 2 types of ‘Units’ – Series ‘A’ or Series ‘B’. Here’s what they look like:

Share price will go down, and that’s not a hard call. Because $SNDL is offering its’ equity value at in exchange for $0.75 cash. If they’re willing to do that, there’s no reason to purchase a share above the value that $SNDL is willing to sell theirs for. A floor is $0.75 on its’ own. Optionality is the second piece.

Remember, market price will change…which…will impact the valuation of the optionality. If the share price changes, the value of the Series ‘A’ warrant will change. At a $0.70 share price, those Series ‘A’ warrant becomes worth only $0.50 USD.

At a $0.90 share price, the Series ‘A’ warrant value becomes $0.69 USD.

I’m reminded of Zenabis’ ($ZENA) absolutely epic ‘rights’ offering, because the value $SNDL is offering up in equity is not only at a discount to market ($0.05 USD), but also at a discount to existing shareholder’s equity (via optionality). $SNDL’s deal is very different than $ZENA’s, but this pricing (presumeably to induce uptake) will negatively impact current share price.

If anything, the preceding should leave you with the knowledge that the value of optionality is dynamic. One cannot offer the same value for two different prices without market forces pushing them together. Based upon my assumptions above, I would expect the share price to drop today to a high 60 cent range. This price represents the value existing in Series ‘B’ (the always ‘at-the-money’ warrants, plus, the value in a 1/2 of the Series ‘A’ warrant). If market price goes down, both of these warrant values decay. An efficient market will take that $0.14 ‘premium’ in equity that $SNDL is coughing up….and trade it.

In theory, market will end up at $0.66….which, is current share price less the ‘discount’ that $SNDL is offering up ($0.80 – $0.14).

The big shops will do their own numbers (they’re really good at doing that), the book-runners will do their own as well (they like money too), and the market will bring it’s own dynamic. It sets up amazingly speculative trading positions – which – I wouldn’t touch personally. Many I’m sure won’t be able to help themselves though. With this offer, trade has been given a floor with which to use as guide.

The ‘X’ factor here is in the timing: will that crazy volume and interest in $SNDL seen yesterday repeat itself? If so, all the math and valuation is right out the window. [EDIT – yep, it’s back. 600MM shares have been traded by 12PM EST. It doesn’t look like the kids though. Around November 5th of last year….volume spiked, and it’s run pretty hot since. Volume went over 2B on November 30th, and over a billion shares the next day. It went back to the November ‘average’ of about 100MM until yesterday, when it went back over that 2B in trade volume again. Quite the numbers. $SNDL did get a nastygram from the NASDAQ in mid December. I won’t take a shot at guessing why at the moment]

On a different note, if the raise is fully up-taken (and 200MM more shares ready to be printed), what’s $SNDL gonna do with all those greenbacks?

They’re going hunting. And not just for assets….they’re going after anything they can get their hands on. Their run at $ZENA wasn’t a one-off:

$SNDL has just become as interesting to me as $ZENA.

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