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Much like in a traditional lottery, winning the Ontario retail cannabis draw appears to come with a big cash prize.

The right to apply for one of the province’s first 25 legal pot store licenses was granted via lottery last week mostly to individuals with no prior retail or cannabis experience. While government rules prevent those sole proprietors from selling their licenses outright to larger corporations, established marijuana retailers are offering winners millions of dollars for the right to brand and operate stores on their behalf.

Bidding wars among those vying for a deal is leading to ballooning valuations and causing some to abandon their pursuit.

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“We dropped out of the bidding after I was told I was not competitive at $10.5-million,” said Dave Martyn, president of Kelowna-based Starbuds, noting his company has been in touch with 12 of the 25 winners in Ontario about potential deals. “I can see the value to it if you’re somebody who has the cash to do it, but it got to the point where we did not see how the economics would ever make sense.”

Offers tended to include an upfront cash payment ranging from $2.5-million to $7.5-million depending on the region, Mr. Martyn said, with the rest coming in the form of covering store construction costs and revenue sharing. Raj Grover, CEO of Canna Cabana parent High Tide, confirmed those figures and that his company is also among the bidders.

“The winners are being quite greedy,” Mr. Grover said, adding he was still in talks with two retail lottery winners and was hoping to get a deal with “at least one.”

“It is crazy stuff going on right now,” he said. “We are not going to waste our time with ridiculous offers just for a six-month head start.”

While negotiations between lottery winners and potential co-operators continue, all deals will almost certainly be closely scrutinized by the Alcohol and Gaming Commission of Ontario (AGCO). In addition to banning license transfers until at least next December, AGCO rules and provincial law require “that any applicant exercise oversight over their retail operations” and they must also “demonstrate that they will exercise sufficient control, either directly or indirectly, over [their] cannabis retail business.”

AGCO spokesperson Raymond Kahnert told Cannabis Professional on Friday that applicants “are not permitted to change their applicant type, ownership and/or corporate structure in such a way that would result in a change of control.”

“It is difficult to see how traditional franchise agreements would pass the requirements [and] a full assessment of any franchise agreement would be made during the eligibility review," Mr. Kahnert said. "At any time during the Lottery Process, if the Registrar determines that an (applicant) has not followed the requirements... that applicant will be disqualified.”

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Ontario has repeatedly insisted the initial 25-store limit is strictly in response to a nationwide cannabis supply shortage, vowing to resume an open licensing system once legal pot stockpiles get closer to demand. When the province abandoned earlier plans last month to allow more than 1,000 pot stores to open province-wide on April 1 in favour of the current “phased” approach, the AGCO designed the lottery process in hopes of ensuring lottery winners would actually be the ones to open stores.

Yet, at least one of last week’s lottery winners has gone on the record to say she had no intentional of overseeing the day-to-day operations of the store she is supposed to open on April 1.

“Dana [Kendal’s] primary interest is not running or otherwise being active in operating a store and as such is looking for a potential partner,” reads part of a letter that a lawyer for one of the winners – Toronto-area family and child therapist Dana Kendal – sent to “interested parties” earlier this week. The letter asked for offers to include a “proposed upfront cash payment.”

Neither Ms. Kendal nor her lawyer, Deborah Weinstein, responded to requests for comment.

Starbuds’ Mr. Martyn said his company and others were being outbid by larger entities in the cannabis space, mentioning Canopy Growth and Tilray specifically, as their preexisting leases in Ontario meant “they could not afford not to open those stores.”

Caitlin O’Hara, a spokesperson for Canopy Growth Corp., said Friday via e-mail that it is participating in a number of ongoing discussions with a variety of individuals and groups.”

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A Tilray spokesperson did not confirm or deny it was talking with lottery winners, but said claims that it was trying to outbid other players were “not accurate.”

Applications for retail store authorizations must be submitted to the AGCO next week. In the meantime, High Tide’s Mr. Grover – who said his company has 20 conditional leases in Ontario and can “jump in anytime” – has a warning for those that might be tempted to write any eight-figure checks for an early-mover advantage.

“If the Ford government decides to open up the whole market in six months, the value [of these store licenses] is going to come crashing down,” Mr. Grover said. “There is going to be a massive store rollout across Ontario and those valuations [will fall] from over $10-million to maybe $1-million per store.”

Conference call with Greg Taylor
Cannabis Professional
What does the continued CannTrust fallout mean for the cannabis industry? Join us for a Cannabis Professional discussion with Mark Rendell and special guest Greg Taylor, CIO at Purpose Investments.

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