Convenience-store giant Alimentation Couche-Tard Inc. is laying the groundwork to move into the global cannabis space, with its announcement on Wednesday of a strategic investment in Fire and Flower Holdings Corp., a young but rapidly expanding Canadian retail pot chain. It’s Couche-Tard’s second and biggest step into Canada’s legal pot market, following a partnership with Canopy Growth Corp. earlier this year.
The latest move positions Couche-Tard – parent of Circle K and Mac’s stores, among other brands – to gain the industry experience to establish itself on the international retail cannabis market if and when other countries legalize marijuana for recreational use. Couche-Tard currently operates more than 16,000 stores in 25 countries, including the United States, where it is a major independent convenience-store operator.
Laval, Que.-based Couche-Tard said it will obtain a 9.9-per-cent ownership interest in Fire and Flower, for $26-million in unsecured convertible debentures. The deal involves three series of share-purchase warrants and the option to increase its ownership in Fire and Flower to a controlling stake at 50.1 per cent on a fully diluted basis, as well as nomination rights to Fire and Flower’s board.
Edmonton-based Fire and Flower said the controlling stake will cost Couche-Tard $380-million over three years.
Through a stake in Fire and Flower, Couche-Tard charts a path to gain retail cannabis experience with a company that aims to establish stores internationally when regulations permit. Fire and Flower, which currently operates 24 stores in three provinces and Yukon, is looking to expand to other countries where recreational cannabis is expected to be legalized in the coming years, and will benefit from Couche-Tard’s global expertise. There are signs that Mexico, New Zealand and Australia could be the next regions to permit retail pot shops.
Earlier this month, Couche-Tard reported that its net profit increased 10 per cent to US$1.8-billion in its most-recent fiscal year ended April 28, up from US$1.67-billion in 2018. Revenues were US$59.1-billion, up 15 per cent from US$51.4 billion.
“This is them sticking a toe in the water here. It’s not a headlong dive into marijuana,” said Brian Madden, senior vice-president and portfolio manager for Goodreid Investment Counsel Corp., which holds Couche-Tard shares.
“For a very modest capital investment, it provides them a path to controlling stake in Fire and Flower. It’s intelligent the way they’ve done it.”
The deal comes five months after Couche-Tarde joined forces with Canopy Growth Corp. in a multiyear agreement in which Couche-Tard made a trademark-licence agreement with an Ontario retail cannabis-lottery winner to open a location with Canopy’s Tweed brand.
“It is our intent to develop cannabis more as an opportunity for us,” said Marie-Noëlle Cano, senior director of Global Communications for Couche-Tarde.
“The goal is that in 2021 we decide whether or not we move forward with shares. It’s our intention to do it. One of the elements we’re going to be looking into is how many stores are opening.”
Couche-Tard aims to build cannabis-retail expertise in Canada and do business in other countries when the product becomes legal and regulated, Ms. Cano said.
“We’ve been working on developing the cannabis market for a couple years now,” she said.
Couche-Tard’s deal with Fire and Flower does not affect its agreement with Canopy.
“We value this partnership and we look forward to maintaining the relationship over the long term. This agreement does not preclude either Canopy nor Couche-Tard from engaging in business partnerships with other parties, nor do such activities nullify pre-existing agreements,” said Caitlin O’Hara, a spokeswoman for Canopy.
"Our partnership with Couche-Tard has been mutually beneficial, and we look forward to our ongoing work together with Couche-Tard and other partners as Canada’s legal recreational market continues to evolve and mature, and new ones around the world emerge.”
Fire and Flower will initially issue Couche-Tard nearly $26-million in debentures that will mature by June 2021, at an 8-per-cent interest rate and which can be converted into common shares at $1.07 each. Fire and Flower must operate no fewer than 45 licensed cannabis retail stores in Canada by that time, roughly double its current outlet count.
“It’s kind of a belt and suspender approach. It means they’re investing with a margin of safety; they’re loaning [Fire and Flower] money,” Mr. Madden said.
“They’re issuing the bond in the amount of $26-million and they will receive an 8-per-cent interest rate. Their own bonds yield around 3 per cent. It’s a good deal and it’s good for Fire and Flower because they need their expertise.”
– With reports from Jameson Berkow