- Zenabis says Tilray to pay $30-million in advance for High Park cannabis supplies
- Deal signals Zenabis will not need to further dilute shares -analysts
- Zenabis to pay strategic analyst roughly $600,000 in shares
Zenabis Global Inc. said on Tuesday that a subsidiary of Tilray Inc. will give the licensed producer (LP) $30-million in advance for roughly a year’s worth of cannabis shipments starting in October, a rare move that is likely the biggest disclosed prepaid supply deal between growers that analysts view as positive for both companies.
The deal will give Tilray’s High Park Holdings Ltd. monthly shipments of dried cannabis starting in October, with the undisclosed amount of supplies tied to the deal expected to “be retired within a year,” Zenabis said.
The deal underscores the creative ways burgeoning LPs are financing their rapid expansions amid tight national supplies of cannabis while attracting investor confidence in the young industry.
“This is a great way to get capital in and allow them to build out, and as they build out they don’t need to dilute the shares any further. I think it’s a very good move for the company,” said Greg McLeish, research analyst for Mackie Research Capital Corporation, referring to Zenabis Ltd, a wholly-owned subsidiary of Vancouver-based Zenabis Global.
“A lot of these larger companies are nervous about having supply agreements with the provinces that they’re not able to deliver on. Going out and signing a supply agreement with Zenabis is a good move. We have seen supply deals with other companies, but there’s been no prepaying.”
Zenabis shares have dropped nearly 70 per cent in 2019 so far, making it one of the weakest performing Canadian LPs year-to-date. Shares of Tilray are down around 33 per cent, also one of the weakest performing LPs, though it is the fourth-biggest Canadian LP by market capitalization at $4.6-billion. For comparison, Zenabis’ market capitalization is around $400-million.
Zenabis chief executive Andrew Grieve said the company is well-positioned to supply cannabis to High Park through the “non-dilutive financing arrangement” that will capitalize on the company’s cultivation capacity that is expected to reach 131,200 kg by October.
“This arrangement significantly reduces the requirement for potential further draws on our $60-million unsecured convertible debenture facility,” Mr. Grieve said.
Additionally, Zenabis said its deadline to pay back $25-million in credit was extended to July 2020, from October 2019.
“We see the news items as addressing about $50mm in debt that was maturing in Oct. 2019, along with significantly reducing the potential for utilizing a $60-million open convertible debenture that could be punitive to the stock,” said GMP Equity Research in a note.
“We expect Zenabis to continue executing on its expansion plans, where it could become a top five Canadian LP supplier with strong partner feedback to support this goal.”
Baron Lee, portfolio manager for Matco Financial in Calgary, also viewed the $30-million in financing through the supply agreement as partially addressing Zenabis’s debt that is maturing in October.
“The supply agreement de-risks their production or the possibility of over-production during the life of the agreement,” Mr. Lee said. “For Tilray to choose Zenabis as a supplier, confirms the quality of product that Zenabis is producing.”
And while Tilray is paying for its supplies up front, Zenabis said it paid its strategic adviser on the deal, Brownstone Advisors Inc., with a fee that includes 319,148 shares, valued around $600,000 at last week’s settlement.