Sundial Growers (NASDAQ:SNDL) announced recently on Mar. 18 that it would issue an additional $800 million in SNDL stock. This is through a brand new agreement with its new underwriter, Canaccord Genuity. If this sale grows through, and there is some substantial doubt it will, Sundial will be overdosing on share dilution. And I can’t imagine why it is doing this, since it doesn’t need the money. It’s almost as if they don’t care about the effect of dilution on their shareholders and SNDL stock.
Based on my article last month on Sundial Growers, I previously estimated that it had 783 million CAD (US$622 million) in cash on its balance sheet. Adding in another US$800 million (1 billion CAD) will raise that balance to 1.783 billion CAD (US$1.422 billion). In addition, the company’s share count had exploded to 1.66 billion shares outstanding.
The new $800 million capital raise might not happen, depending on the price Sundial sells its shares. It is not clear, however, that there is a minimum offering price. The prospectus seems to imply that the price will be $1.54. This would also increase the number of shares by 519.5 million from 1.660 billion 80.6% to 2.1797 billion shares. That would raise the share count by 31.3%.
But since Mar. 18 SNDL stock has dropped like a rock to just $1.02 per share, as of April 6. And no wonder, Sundial is talking about diluting existing shareholders by almost one-third, just to add in more cash.
Moreover, if Sundial were to sell $800 million in SNDL stock at $1.10 per share, the dilution would be much higher. For example, this would involve selling 727.27 million shares, instead of 519.5 million shares. This would raise the share count by 43.8% to 2.387 billion. Dilution galore.
And for what? For example, at the end of 2020, Sundial had just 65.3 million CAD ($51.9 million) in cash and just 918.8 million in shares outstanding, according to its 20-F filing. Since then cash has exploded to 783 million CAD $and the share count is now up by 80.6%. This new $800 million share raise will increase dilution by 137% to as much as 160%. And all of that in the space of just a little over 3 months since the end of Dec. 2020.
The company has not said why it needs so much cash, other than for general working capital and corporate purposes. Therefore, the only conclusion I can reach is that the company is willing to overdose on dilution.
What To Do With SNDL Stock
Sundial Growers management does not seem to care about their share dilution. They must believe that massively diluting shareholders to gain more cash is a legitimate way to make SNDL stock rise.
But, of course, the market is not having this. The more SNDL stock faces dilution, the more it falls. And the market doesn’t know exactly why the company is raising so much cash. There is no major acquisition on the horizon, at least as far as the public knows.
Or is there? As it stands now, with 1.66 billion shares at $1.02 per share, the market cap for SNDL stock is $1.69 billion. That could be high enough to possibly buy another major cannabis company, or to merge, just like Tilray (NASDAQ:TLRY) and Aphria (NASDAQ:APHA). They are planning to merge to make the largest cannabis company by revenue.
For example, HEXO Corp. (NYSE:HEXO), another major Canadian cannabis company, has a lower market cap of just $765 million. However, Aurora Cannabis (NYSE:ACB) has a very similar $1.77 billion market capitalization. They could now consider a merger of equals. Moreover, as Sundial now has a huge and growing cash pile, it could be very attractive to these suitors.
Here is the bottom line – cash is inching up as a percentage of the market value. If Sundial is successful at raising $800 million at $1.10 per share, it will have $1.422 billion in cash and 2.387 billion shares outstanding. That means cash per share equates to 59.6 cents per share or 60 cents. That is 54.1% of a stock price at $1.10.
Therefore, assuming the cannabis is worth no more than 10 cents per share, at 3 times sales, SNDL stock, including its cash per share, is worth just 70 cents. That represents a potential drop of 40 cents or another 36% from here.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.