Sundial CEO Zachary George on His Cannabis Quest: A Few Companies Will Run the Table
A Conversation Between Christopher Skroupa, Skytop Editor-in-Chief, and Zachary George, Chief Executive Officer & Director, Sundial Growers, Inc. / December 15th, 2021
Zachary George brings a wealth of experience to Sundial having spent more than 15 years evaluating catalyst-based investment opportunities across the capital structure of North American companies with a focus on real assets. Mr. George has worked in a management capacity, including as a Chief Executive Officer with numerous corporate boards to turn around operations, effect corporate action and implement governance policies in order to maximize shareholder value.
Mr. George received an undergraduate degree from Simon Fraser University and a graduate degree from Brooklyn Law School.
Christopher Skroupa: In 2020 Sundial Growers went through restructuring, with a part of the company engaged with the cannabis operations and the other part engaged with investment operations. Tell us about this restructuring.
Zachary George: Of course. Sundial Growers is close to two years into restructuring, and we have been able to rapidly reshape our business model to focus on a two-pillar strategy that we believe will position our shareholders for future success.
The first pillar consists of our core cannabis operations, where we are leveraging our strong financial position to align our operations with what we expect to be a more stable, healthy, and profitable cannabis market.
The second pillar of our business is our investment operations where we are putting our liquidity position to work by strategically investing and providing our investors with exposure to the rapidly growing global cannabis industry. Much of our capital exposure to date has been committed to our joint venture, SunStream Bancorp. The SunStream Bancorp team is focused on deploying capital within the cannabis sector on an attractive risk-adjusted basis and is exploring a broad-spectrum opportunity throughout the financial sector.
Christopher: Why restructure now?
Zachary: When I stepped into the role of CEO in 2020, my team and I assessed the opportunities in the Canadian market. We concluded that the Canadian market is oversupplied and broken, affecting our abilities to generate sufficient profit. We started looking for the best course of action to maximize returns and found that certain capital providers were earning the lion’s share of economics in the industry. Access to both debt and equity capital continues to be challenging, resulting in a very high cost of capital in the sector. Starting in late 2020, we raised more than CAD$1 billion. This capital enabled us to eliminate our debt and fix our unsustainable capital structure and resulted in Sundial holding large cash balances.
Christopher: How have you used these large cash balances?
Zachary: In December 2020, we acquired our first loan to Zenabis, which has since been acquired by HEXO. In early 2021 we formed a joint venture called SunStream Bancorp with partner SAF Group. In fact, much of our capital commitments flow through this joint venture. Not all of our investments are part of the SunStream joint venture. For instance, we have made investments in Indiva and The Valens Company. Maximizing our returns on deployed capital and corporate stewardship are key priorities for our Board and management team. Our balance sheet remains strong, and we remain debt-free.
Christopher: And you are providing structured and secured credit to North American cannabis companies. What is the value in that for Sundial?
Zachary: Deploying secured and structured credit capital through our compliant JV structure will drive large operating cash flows to the investment side of our business. The resulting margin rich, interest income provides an attractive buffer to our core cannabis operations which continue to consume capital as the Canadian market becomes healthier. Now we have invested over $300,000,000 in the U.S., and we have exposure to U.S. MSOs.
Christopher: You mentioned future M&A activities. But tell us about recent acquisitions.
Zachary: Earlier in 2021 we acquired Inner Spirit and the Spiritleaf retail cannabis network. That means we now have over 110 company-owned or franchised retail Canadian locations. We have also announced a definitive agreement to acquire liquor retailer Alcanna, which has yet to close.. We see these acquisitions as an opportunity to not only be competitive in the market but to be a better industry partner. It will allow us to shine a spotlight on our brands and be better positioned to execute transactions. A larger and more comprehensive retail distribution network is core to our strategy.
We do not have any more M&A to announce right now, but we are looking at future M&A opportunities that will add to our operations capabilities.
Christopher: What does the future hold for Sundial?
Zachary: I see the cannabis operations and the investment operations both driving value. We have a credit portfolio of over $400 million, well-chosen equity investments, and cash balances of almost $600 million Canadian. We will continue to apply a rigorous and thorough approach to capital allocation that will allow us to be confident about the Canadian market despite current challenges. We also have about 2.4 million individual investors. As we continue to engage with this investor base and mature as a business, we anticipate more engagement with institutional investors. As well, we will work for the integration of our announced acquisitions. I believe the Canadian industry’s future will see a market with limited competition where there will be a few producers who control most of the market share. We are prepared for the reckoning that we believe will occur in 2022 and are focused on internal improvements while being well positioned to take advantage of distress in the cannabis sector.
Christopher: Zachary, thank you for sharing your insights. We look forward to your continued success.