Some Ontario lottery winners in talks with cannabis companies

Dana Kendal does not want to run one of Ontario’s first cannabis retail stores.

The province is allocating 25 licences to operate a marijuana location when legal sales start on April 1, and the Alcohol and Gaming Commission of Ontario awarded the right to apply for those permits via random lottery on Friday. Most are individuals with no experience in the cannabis or retail industries. Ms. Kendal, a child-and-family therapist with a masters in social work, was among five people selected from nearly 14,000 entries in the City of Toronto region, and is now seeking professional help.

She has already “received numerous inquiries regarding partnership, franchising and outright sale (when legally permitted),” according to a letter from her Ottawa-based lawyer, Deborah Weinstein, addressed to “interested parties,” a copy of which was obtained by The Globe and Mail’s Cannabis Professional.

“Dana’s primary interest is not running or otherwise being active in operating a store and as such is looking for a potential partner who ... offers the best outcome for her and her family,” Ms. Weinstein said in the letter dated Jan. 13.

The options could include an outright buyout, the letter said, while noting Ontario will not allow licenses to be sold or transferred until at least next December, “or some form of partnering or franchising, with as stated above all financing, set-up, operations, management and liabilities borne by the proposed acquirer, partner or franchisor.”

Kelowna-based cannabis retailer Starbuds is among those vying to work with Ms. Kendal, company president Dave Martyn confirmed via e-mail, although he declined to disclose the terms of his offer. Mr. Martyn added that Starbuds is having discussions with 10 of the 25 winners announced on Friday.

“It is going to be a wild week as applicants decide who their partners are,” Mr. Martyn said. “But we are certain that there will be a seven-figure upside to those winners from retailers.”

As The Globe and Mail reported Monday, large corporations currently selling cannabis legally in other parts of Canada are already in pursuit of Ontario’s lottery winners in hopes of being among the first professional pot sellers to enter Canada’s largest consumer market. According to Ms. Weinstein’s letter, indications of interest will be accepted until noon eastern time on Tuesday, Jan. 15 and “must include… a proposed upfront cash payment on closing [and] no condition of financing.”

Bidders hoping to work with Ms. Kendal must also provide “confirmation that a binding letter of intent with a non-refundable deposit can be executed and funds wired to our firm’s trust account prior to noon on Friday, January 18, 2019,” Ms. Weinstein’s letter said.

AGCO rules and provincial law require “that any applicant exercise oversight over their retail operations,” said Jesse Robichaud, spokesperson for Ontario Attorney-General Caroline Mulroney. All 25 lottery winners, Ms. Kendal included, will also have to “demonstrate that they will exercise sufficient control, either directly or indirectly, over [their] cannabis retail business,” Mr. Robichaud said.

Friday is the deadline for lottery winners to submit their formal applications, which must include $6,000 in non-refundable fees and a $50,000 letter of credit, to the AGCO. Both Ms. Weinstein and Ms. Kendal declined to comment beyond confirming the contents of the letter, although whoever does end up providing that money will be taking on substantial risk. Failure to open for business by April 1 will result in fines ranging from $12,500 to $50,000 depending on how long pot sales are delayed.

Cannabis retail stores across Canada are expected to generate millions of dollars in sales per year. National Access Cannabis, for example, generated more than $10-million in revenue from its 20 NewLeaf and Meta Cannabis stores in Alberta and Manitoba over about 80 days of sales after Oct. 17, suggesting average annual per-store revenue of more than $2-million.

The first stores to open in Ontario are expected to be especially lucrative. That is based on the notion of scarcity. The province last month replaced its plan to allow more than 1,000 privately run cannabis stores to open on April 1 with a “phased approach” that limited the initial round of licensing to 25, based on concerns over a lack of supply.

While at least some of Friday’s winners are looking to extract value from their victories without having to open a cannabis store, others are planning to use the opportunity as it was intended.

“We are currently in the initial application phase and are extremely busy sorting everything out,” The Niagara Herbalist, one of seven winners selected from western Ontario, said in a Sunday afternoon update to its Facebook page. “At this moment in time, we are looking at a few locations in the Niagara Region. However, due to some cities/towns being undecided on whether to opt in or out, we cannot confirm this information [but] rest assured that as soon as we know, you will too.”

Ontario municipalities have until Jan. 22 to decide whether to allow cannabis retail stores. Those that opt out will be allowed to change their minds later, but cities that opt in cannot back out.

As of Monday afternoon, 46 Ontario communities have banned pot shops at least temporarily, including some larger Toronto-area cities such as Mississauga, Markham and Richmond Hill.

In response to questions sent via Facebook Messenger, The Niagara Herbalist described itself as “a family-run business based in the Niagara region” that is “excited for this opportunity,” but declined to provide any further information.