When Canadian cannabis company Cronos Group Inc. bought U.S. CBD startup Lord Jones for $300 million, the deal was noteworthy for two reasons: (1.) that the acquisition price was equal to 75 to 150 times the young company’s 2018 revenue of between $2 million and $4 million, according to a person familiar with the matter, and (2.) that a fund co-founded by Cronos’s CEO and a longtime director stood to collect 40% of the purchase price, including more than $20 million in fees.
Cronos /zigman2/quotes/206842762/composite CRON -6.95% /zigman2/quotes/202715342/delayed CA:CRON -6.42% , one of Canada’s five biggest licensed cannabis producers, announced the acquisition of the 2-year-old startup in August.
As cannabis market leader Canopy Growth Corp. has attracted a $4 billion investment from beer, wine and spirits giant Constellation Brands /zigman2/quotes/207737284/composite STZ -2.09% , Cronos has a $1.8 billion investment from tobacco company Altria Group Inc. /zigman2/quotes/208895754/composite MO +0.31% , arming it with a war chest to fund acquisitions and grow its business. Altria paid that sum to acquire a 45% stake in Cronos along with warrants that, if exercised, would raise that stake to 55%. The investment, made in December of 2018, gave Altria an exclusive partnership in the cannabis sector just months after Canada fully legalized weed.
Cronos’ CEO, Michael Gorenstein, and board member Jason Adler also have a private-equity firm called Gotham Green Partners that paid $12.8 million for a 40% stake in Lord Jones, according to a document reviewed by MarketWatch. Gotham Green used the document as what a cannabis industry investor described as a “pitch deck” for potential investors in one of its funds. Gotham Green stood to make $21 million in fees, based on the management-fee structure outlined in the document, from a $107.2 million profit on the increase in value of Lord Jones shares. Gorenstein and Adler recused themselves from the negotiations, which were conducted by a special committee, the majority of which were Altria appointees, according to a filing with the Canadian regulator.
According to another filing with Canadian regulators, Gotham Green’s Goreinstein disclosed receiving roughly $23 million in Cronos stock — 40% of the stock included in the deal, which was $225 million in cash and $75 million in stock — identifying it as “related to an acquisition or disposition pursuant to a takeover bid or acquisition” on Sept. 5, the day the Lord Jones acquisition closed.
“In connection with the transaction Gotham Green will receive consideration commensurate with its ownership stake in Redwood,” Cronos spokeswoman Anna Shlimak wrote in an email to MarketWatch. “Like all general partners in Gotham Green, Mike Gorenstein will be compensated accordingly.”
Lord Jones sold $2 million to $4 million in CBD products in 2018, according to a person familiar with Lord Jones’s revenue, which would mean the deal was worth 75 to 150 times the startup’s annual revenue for the most recently completed year. Cronos has not released financial information about Lord Jones and did not comment on its revenue.
A person familiar with the private company’s revenue said that its sales will grow “significantly” from that total this year, declining to elaborate further. Another person familiar with Lord Jones revenue said it achieved a monthly run rate of $2 million around the time Cronos announced its intention to buy the company.
Lord Jones — founded in 2017 by California married couple Robert Rosenheck and Cindy Capobianco — approached Cronos for the sale, after its co-founders decided that it needed a partner to expand the business, a Cronos spokeswoman said in an email to MarketWatch.
The special committee negotiated the deal and voted unanimously in favor of it, according to Cronos. Altria signed off on the transaction, as is required of any deal in which Cronos engages that is valued at more than C$100 million ($76.6 million), according to the company’s rights agreement.
“We believe that with this investment Cronos is well-positioned in the rapidly growing U.S. hemp-based CBD products category,” Altria spokesman George Parman said in an email message. Altria declined to comment on the multiple, referring questions to Cronos, which declined to comment.
Lord Jones sells CBD products such as beauty and skin-care products, tinctures and edibles abroad and in the U.S., at such retail outlets as Sephora and the Standard Hotel, according to the document.
See also: Three things you need to know about CBD
The price Cronos agreed to pay for Lord Jones appears higher than the valuations other investors have granted larger companies interested or involved in the CBD-products business. Tilray Inc. /zigman2/quotes/209129655/composite TLRY -4.63% bought hemp-products maker Manitoba Harvest for up to C$419 million, with plans to launch a line of CBD products. Manitoba Harvest has a mature hemp business with C$94 million in 2018 revenue, resulting in a narrower price-to-revenue multiple than Lord Jones’s apparent valuation on this basis.