After announcing restructuring late this summer, Canadian cannabis retailer Tokyo Smoke has exited the Companies' Creditors Arrangement Act (CCAA) process. This comes after the case got final approval from the Ontario Superior Court of Justice.
“The majority of Tokyo Smoke's retail locations were unaffected by the restructuring, and there will be no disruption or change to the Company's online business, or to The High Roller Club loyalty program,” a press release put out by Tokyo Smoke said on Friday.
Backtracking a little: Tokyo Smoke announced it would be shuttering 29 stores across the country as it entered into creditor protection this past August. A release from the retailer at that time explained that it had obtained an initial order under the CCAA from the Ontario Superior Court, and that 167 locations across Ontario, Manitoba, Saskatchewan, and Newfoundland and Labrador will remain operational during the restructuring proceedings.
Okay, but why?
Court filings from Alvarez & Marsal Canada Inc., explained that changes in regulatory conditions have “devalued cannabis retail licenses and saturated the market.” In Ontario alone, the number of cannabis retail licenses has allegedly shot up from less than 100 to over 1,600, and this has put “downward price pressures on retail cannabis due to lack of product differentiation between retailers.”
At the time of the CCAA proceedings, the retailer’s book value of liabilities exceeds the book value of its assets by approximately $89.1M, according to an August 27 document.
“As [of] June 30, 2024, the applicants held assets with a book value of approximately $148.2M and had liabilities with a book value of approximately $237.4M,” the August document reads. “The companies have been operating at a loss and are wholly dependent on financing from related parties and third-party lenders to meet their working capital needs. Tokyo Smoke had a net loss of $29.3M for the fiscal year ended June 30, 2024. Without financing, the companies are not able to satisfy their obligations as they become due.”
The restructuring process resulted in the immediate closure of the aforementioned 29 stores, as mentioned, and the beginning of negotiations with landlords to seek “consensual lease amendments,” and the termination of other contracts and franchise agreements in order to “streamline the overhead cost structure.”
Stalking Horse Kicks Off, Ends
About a month after announcing that it would be entering into creditor protection, Tokyo Smoke revealed that it had started the stalking horse process. The purchase involved Tokyo Smoke’s parent company, TS Investments Corp (its parent company), and a Stalking Horse Agreement in the amount of, approximately, $77 million (CAD).
For context, a stalking horse agreement is something that is arranged ahead of a bid deadline at a certain amount, and if competing bidders are not able to meet that amount, the asset goes to the stalking horse bidder. In this case, TS was the successful stalking horse bidder.
The November 29 press release explained that Tokyo Smoke has emerged from CCAA and stalking horse proceedings “as a stronger business, better positioned to continue providing premium products and service to its customers over the long-term — while continuing to provide jobs to hundreds of dedicated employees across Canada.” It also says that the company will “continue its commitment to bringing Canadians the highest quality regulated products, online and in-person, through its expansive retail network, while educating and empowering customers to make well-informed decisions about safe, high-quality cannabis offerings that reflect Canadians' interests, neighbourhood by neighbourhood.”
