Late Tuesday, cannabis firms SNDL (US:SNDL), formerly known as Sundial, and Nova (CA:NOVC) unveiled a strategic partnership to create a new retail platform for the Canadian market. The deal is expected to develop a sustainable regulated retail network across Canada and help both organizations focus on profitability.

The companies said the pact would provide Nova with a low-cost operating platform and additional liquidity to fund growth plans. At the same time, SNDL will gain stable free cash flows from license fees on the platform and de-risk the business from store-level profitability risks. The transaction is expected to be completed in May 2023 and is subject to various conditions, including regulatory approvals.

Nova’s board unanimously approved the transaction and recommended that shareholders vote in favor. As part of the deal, SNDL will acquire the IP rights to Nova’s Value Buds banner of 88 retail stores and the license to operate the Valuebuds, Spiritleaf, and Superette banners. SNDL will also license its brands’ IP and platform for a fee of between 5% and 15% of gross profits on each store under the banner, starting one year after the transaction. The license fee will be calculated on the 114 existing locations of the pro forma Nova platform.

On Nova’s end, the company will receive retail contributions from the existing 26 cannabis retail stores under the Spiritleaf and Superette brands across Ontario and Alberta provinces. Corporate services will be provided for no fees for the first three years, with a $2 million annual fee after that. Nova’s $15 million revolving credit facility with SNDL, expected to be fully drawn at the transaction’s closing, will be eliminated, providing Nova with about $5.5 million in liquidity from the undrawn balance. A new $15 million facility will be established following the transaction.

SNDL will return about 14.3 million Nova shares held on the balance sheet to the company for cancellation, worth about $11.87 million based on Tuesday’s closing price. SNDL will also reduce its equity ownership to below 20% of Nova’s float through a capital distribution to SNDL shareholders to diversify ownership.

The deal is the latest push by the cannabis industry to consolidate an oversupplied, new and growing market to generate profitable and sustainable margins for investors over the long term.

Fintel’s consensus target price forecast of $4.23 for SNDL has dropped from $4.29 at the beginning of December but continues to suggest analysts remain positive on the medium term outlook for the stock.

Before this transaction, in early November, SNDL announced the acquisition of Zenabis Group with Fintel journalists covering the transaction

This article originally appeared on Fintel

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