Level Brands to Acquire cbdMD in All Stock Transaction
Level Brands is betting the farm on hemp.
The company, which went public in 2017 as a licensing vehicle for Kathy Ireland’s kathy ireland Worldwide, announced this week it would acquire Cure Based Development LLC, owner of consumer cannabidiol (CBD) brand cbdMD. The target company manufactures products such as gummies, oils and “bath bombs” containing CBD, a hemp derivative that has health benefits but doesn’t have psychotropic effects like the “high” caused by THC in marijuana.
Until now, Level Brands was a company that generally made money collecting licensing revenue from companies that wanted to use the Kathy Ireland name on products such as cosmetics brushes and sunglasses. Earlier in 2018, Level Brands dipped its toe in the hemp business through a licensing deal with Isodiol to use the Kathy Ireland brand on a range of CBD products.
The proposed acquisition is far and away the most significant deal Level Brands has done. If it closes, the majority of Level Brands’s revenue looks set to come from cbdMD, which was generating sales at a run-rate of $12 million a year as of October. That compares with $7 million in sales for Level Brands in the nine months through June.
Also, the all-stock deal will result in a roughly 150{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} increase in the company’s share count. That will make cbdMD founder Scott Coffman, who will continue to oversee the business unit and take a seat on Level Brands’s board, the largest shareholder. There is also another payment to cbdMD if the company hits sales of $300 million within 60 months.
A key condition of the deal is that President Trump signs the so-called Farm Bill of 2018. Once that happens, CBD will no longer be treated as a controlled substance by the Federal government. According to leading cannabis attorneys, that will prompt an enormous amount of interest from national retailers that have not yet begun selling CBD.
And while states have their own laws around hemp, they are very likely to adjust those quickly to come into alignment with Federal law. “It may be as simple as excising hemp from the definition of marijuana,” says David Holland, a leading cannabis attorney in New York.
Naturally, there will be stiff competition to get products on the shelves of national retailers. But the market for CBD products is very fragmented, with small, local producers often supplying CBD retailers like smoke shops.
The main competition is likely to be CV Sciences, which is somewhat larger than cbdMD. CV Sciences, which got into the game a couple of years before cbdMD, had sales of $13.6 million last quarter with a distribution network of 2,093 stores. That compares with about 700 stores across 40 states for cbdMD.
Fortunately, it probably won’t be a winner-take-all outcome. The industry is likely to expand so fast that there will be plenty of sales to go around. The U.S. CBD market is expected to grow to nearly $2 billion in 2022 from $534 million in 2018, according to New Frontier Data.
And Level Brands may have an edge when it comes to brand building. For one thing, Mr. Coffman has a strong track record: He founded e-cigarette company Blu in 2009 and sold it to Lorillard just three years later for $135 million.
Ultimately it is the power of cbdMD’s brand that will drive success. And Level Brands’s licensing business certainly has demonstrated the company’s ability to maximize brand value for Kathy Ireland.
And once cbdMD establishes ties with major retailers, there is scope for other products sales down the road – such as legal marijuana. By focusing on the CBD market cleared by federal legislation, cbdMD can “establish a route to market with distribution that is also fungible with cannabis,” says Joseph Bondy, another prominent cannabis attorney based in New York. “The brand that the company builds with consumers will also prove valuable.”
At the current share price of $4, Level Brands’s post deal market capitalization will be roughly $100 million. That appears steep based on the current run-rate annual sales of $12 million. But with the Farm Bill about to pass and business already growing at a blistering pace, shareholders should embrace the company’s bold transformation.
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