Cronos Group took a big step into the U.S. recently with its acquisition of hemp-derived CBD brands and assets owned by California-based Redwood Holding Group.
Altria’s $1.8-billion investment in Cronos Group stood out last year, comparable in scope only to Constellation Brands’ nearly $4-billion investment in Canopy Growth. The industry can see how the Constellation move has evolved; Canopy Growth is in the midst of a cross-border merger with Acreage Holdings (contingent on some form of cannabis legalization in the U.S.). For the Altria-Cronos investment, which closed in March 2019, the path ahead has become clearer with the Redwood news.
Redwood is a hemp-derived CBD retailer known for its Lord Jones brand of CBD skincare lotions and oils sold at Sephora. Robert Rosenheck and Cindy Capobianco, husband and wife, started Lord Jones in 2015. They’ll join Cronos Group upon completion of this acquisition.
“Rob and Cindy have built a differentiated, best-in-class platform with hemp-based CBD formulations that stand for quality and consistency,” said Mike Gorenstein, Cronos Group’s chairman, president and CEO. “Our goal is to preserve the integrity of all Rob and Cindy have created, while also learning from them and leveraging Cronos Group’s resources to capitalize on the significant demand for skincare and other consumer products derived from hemp. Leading the industry forward responsibly and being a part of the conversation with industry stakeholders remains a top priority for Cronos Group in this evolving area.”
Benzinga writer Wayne Duggan cited Bank of America analyst Christopher Carey with a look ahead to Cronos Group’s greater aspirations in the CBD marketplace: “We view LJ as just the tip of the iceberg for Cronos U.S. CBD; indeed, the much bigger opportunity has yet to be unveiled, which we believe will be a potentially significant launch of CBD products into Altria-familiar channels (230,000 U.S. distribution points), namely convenience stores.”
The line between Canadian cannabis companies and the broader U.S. market is beginning to blur through increased M&A activity like this recent Cronos deal. The passage of the 2018 Farm Bill has opened up significant consumer interest in CBD products, and it’s hard to ignore Brightfield Group’s prediction that CBD will outpace all other cannabis markets and rapidly expand to a $22-billion opportunity by 2022.
While many Canadian cannabis producers are financing acquisitions through a preponderance of stock options, the mostly cash-rich deal from Cronos Group signifies a departure from that norm. And in this case, much of that cash originated in the U.S.—at Altria (manufacturer of Marlboro cigarettes).
All told, Cronos is picking up Redwood for $300 million—and $225 million of that purchase price will come as cash on-hand. (The rest of the deal is finished off with newly issued shares of Cronos stock.) Liquid capital is king, as the old saying goes, and the Cronos move shows what can be accomplished far more easily when U.S. benefactors begin spending cash on the burgeoning cannabis industry—even before federal legalization policies alight on the horizon.
