Toronto-based pot producer Cronos Group Inc. (TSX:CRON) said on Friday it is jumping into the U.S. CBD market by acquiring Redwood Holding Group, the company behind the high-end CBD brand Lord Jones, for US$300 million.
Cronos will pay US$225 million in cash and the rest in stock for Redwood’s four operating subsidiaries, the company announced in a press release. Shares of Cronos shot up 8.5 per cent on Friday, its best day of trading since June.
Redwood sells hemp CBD-infused lotions, bath salts and gummies under the popular Lord Jones beauty brand. The CBD products are sold online and in major U.S. retail stores, and Lord Jones was the first brand to be sold in beauty store chain Sephora.
This is Cronos’ first U.S. deal and it will give it a foothold into the country’s burgeoning market for CBD, also known as cannabidiol, the wildly popular wellness compound that proponents say can treat anything from acne to anxiety.
Redwood was co-founded in 2017 by husband and wife Robert Rosenheck and Cindy Capobianco who started Lord Jones in 2015. The two will will join Cronos, along with Redwood’s management and brands, and continue to lead the development of their platform.
“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,” Cronos CEO Mike Gorenstein said in a statement.
The deal is expected to close in the third quarter of 2019, pending regulatory approval.
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Cronos’ push to be a world-leading CBD company
The deal buys Cronos access to the U.S. CBD market, as the company aims to be one of the leaders in the cannabidiol space.
Cronos already is the fourth most valuable cannabis firm in Canada, with a market capitalization of $5.8 billion. But making its first foray in the expanding U.S. CBD sector could drive the company’s business to new heights.
According to market research group Brightfield, American CBD sales will reach almost US$24 billion by 2023.
As much as the interest for CBD products has exploded in the U.S. in 2019, the bulk of Brightfield’s lofty forecast is hinged upon the Food and Drug Administration approving CBD to be sold in food and supplements.
Today, CBD in candies, drinks or any ingestible product is technically illegal in the U.S. as regulations remain murky for the wellness compound. Congress made legalized CBD late last year with the passing of the Farm Bill, but the FDA so far only permits the cannabinoid in topical products.
The law team at Cronos will surely be looking into the details of the warning issued by the FDA to American pot company Curaleaf Holdings Inc. (CSE:CURA) for making unfounded claims for its CBD topical, oils and pet products.
Considering Lord Jones openly sells CBD edibles online and with U.S. major retailers, Cronos is more than likely already stepping up precautions for the selling practices of its new asset.
The FDA recently said it is expediting the process to come up with rules for CBD and will release an update by early fall.
Altria deal helps spur Cronos’ growth
Back in March, Cronos took a US$1.8 billion investment from Marlboro maker and tobacco giant Altria Group Inc. (NYSE:MO), which injected new investor interest into the burgeoning cannabis sector. In June, CEO Gorenstein said the deal will help Cronos expand into the U.S. CBD market, which turned out true with its Redwood acquisition on Friday.
The company’s Redwood/Lord Jones purchase comes only weeks after Cronos announced it used cash to acquire an 84,000 square foot GMP compliant fermentation and manufacturing facility in Winnipeg, Canada from Apotex Fermentation Inc.
The state-of-the-art facility includes functioning labs for microbiology that will be utilized between Cronos and its new partner Ginko Bioworks. The site has a combined production capacity of 102,000 liters, and the two companies will produce new forms of cultured cannabinoids to supply innovative next-generation products when they become legal and available for sale in Canada later this year.