On Monday July 23 Aphria Inc. (TSE: APH) announced another step forward in their retail and branding strategy by making an investment in Fire and Flower Inc. a marijuana retailer with plans to open 58 store locations in Alberta, B.C. and Saskatchewan.

Aphria has moved on quickly to shore up their retail brand after Canopy Growth’s purchase of Hiku Brands removed that company from Aphria’s roster.

This deal is another prudent one by management due to both its reasonable size and the terms of the financing.

Canopy Growth paid $230 million just for the retail strategy of Hiku which included 7 retail coffee shops, 10 approved retail locations and 17 retail applications or 37 locations total.

In contrast Aphria paid $9.2 million net of interest for a stake in Fire and Flower Inc., which has one approved retail location and 57 additional locations planned or 58 total.

The investment in Fire and Flower is a relatively low cost way for Aphria to build a suite of retail brands that appeal to all consumer groups.

Deal Structure

The investment from Aphria is structured as convertible debt and is attractive from an Aphria shareholder standpoint as the debt pays interest while Fire and Flower is building out its retail strategy and also allows for Aphria to share in the company’s profit due to the debt’s convertibility into shares.

Aphria will be paid $800,000 over the next year for it’s $10 million investment in Fire and Flower and will have the option to convert the debt into shares at $1.15 per share in an IPO scenario or can choose to keep the loan longer term and earn interest of 12%, an attractive rate.

Aphria has covered their bases in this deal with downside protection related to dilution which likely means if Fire and Flower issued more equity Aphria will be issued more shares for free to keep their ownership percentage the same, a positive feature.

Overall Aphria’s investment in Fire and Flower is a relatively low cost way to build a suite of retail brands that appeal to all consumer groups.

Aphria investors should like this deal.

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