Less than a month after announcing that it would be entering into creditor protection, Canadian cannabis retailer Tokyo Smoke has revealed that it has kicked off the stalking horse process. This means that the company stands to be bought out in an effort to maximize the value of its assets.
Some of the terms of the agreement were revealed on Thursday afternoon via press release; that stated that Tokyo Smoke has entered into an agreement with its parent company, TS Investments Corp., pursuant to which TS “will subscribe for all of the issued and outstanding shares of Tokyo Smoke.” But worth noting: a motion was made public earlier this week via Alvarez & Marsal Canada Inc. that iterated the stalking horse agreement and its terms. According to that motion, the stalking horse agreement was set to be presented to a judge on Thursday.
As the motion and the press release explain, Tokyo Smoke has entered into a “share subscription agreement” with its parent company, TS Investments, and according to that, TS will subscribe for all of the issued and outstanding shares of Tokyo Smoke.
“The purchase price under the Stalking Horse Agreement is approximately $77 million [CAD] plus the buyer's obligation to assume certain liabilities,” says the release. “Tokyo Smoke is pleased to have the support of the parent company through the stalking horse agreement as part of its continued commitment to the business.”
Under the terms of the stalking horse agreement, Tokyo Smoke has entered into restructuring proceedings, the release also notes, which was a step necessary to undertake this sale and investment solicitation process “to solicit interest in and opportunities for a sale, restructuring, recapitalization or other form of reorganization of the company's business for a purchase price above the purchase price being offered by the buyer under the stalking horse agreement.”
At present, “interested bidders” are being encouraged to submit their bids. The sales process is planned to be a “two-phase” process that will begin today — on September 20 — and the first phase of the process is intended to bring in “non-binding letters of interest.” The deadline to submit letters of interest has been set for October 21, according to the aforementioned motion. A second phase to consider interested bidders is anticipated to have a deadline of November 11.
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.
The Restructuring
Tokyo Smoke revealed on August 28 that it has filed for an initial order under the Companies' Creditors Arrangement Act (CCAA) from the Ontario Superior Court, and would be shuttering 29 stores. At that time, it was also revealed that 167 locations across Ontario, Manitoba, Saskatchewan and Newfoundland and Labrador would remain operational during the restructuring proceedings.
“Following a thorough review of all available options and alternatives, Tokyo Smoke commenced the restructuring to align its operations with current market and regulatory conditions, which have significantly changed since the initial licensing regimes in the provinces where Tokyo Smoke operates were introduced,” the company said via press release.
Court filings from Alvarez & Marsal shed more light on the events that prompted Tokyo Smoke to file for creditor protection, noting 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.”
As such, 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 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.”
