Debra Borchardt
Hawthorne, the hydroponic subsidiary of fertilizer company The Scotts Miracle-Gro Co. (NYSE: SMG), is looking to strike out on its own – a move that Scotts CEO Jim Hagedorn hinted at on the company’s earnings call in November.
“We’ve made progress on a range of potential solutions that should benefit shareholders and create opportunities for that business to grow,” Hagedorn said about Hawthorne at the time. “We’re in active discussions to create a leading vertically integrated cannabis company. I can’t share more at this time, but we will provide an update as soon as we can.”
Just a few years ago, Hawthorne was riding high as the cannabis industry’s mantra was bigger is better. Multistate operators were competing with each other over who could build the biggest grow facilities – and that meant lots and lots of lights.
However, the cannabis bubble burst and the business wilted. Hawthorne President Chris Hagedorn made difficult decisions to adjust to the new reality and eliminated almost a thousand jobs. He restructured debt and cut expenses.
Now the company is positioning itself to become profitable again.
Options
Green Market Report spoke with Jim and Chris Hagedorn at the MJBiz Conference last week, where the two opened up about the options being considered. Essentially, there appear to be two roads out of Scotts:
- Spinning out into a separate public company
- Joining forces with Riv Capital (TSX: RIV) (OTC: CNPOF), which has an investment connection with Hawthorne
“We’ve said as much publicly, but I think the interesting part of the conversation is why?” Jim Hagedorn said. “(Scotts will) keep the debt. You move it without any debt at all. So completely clean. Hundreds of millions of inventory and upward capital.”
New PubCo
Scotts could spin Hawthorne out into its own public company where it would compete with the likes of Ubi-grow, Agrify, and Grow Generation. However, these companies receive little analyst coverage, and there is concern that Hawthorne’s assets wouldn’t be recognized.
Hawthorne has engaged in considerable research, and Chris Hagedorn doesn’t want that to get lost by being lumped in with other hydroponic companies.
Riv Capital Option
Riv Capital and Hawthorne are already associated with each other. In 2021, RIV Capital Inc. signed a deal with The Hawthorne Collective, a cannabis-focused subsidiary of Scotts for the purchase of a $150 million unsecured convertible note from RIV Capital.
However, Riv Capital is best known for paying top dollar to buy New York medical operator Etain. The Hagedorns acknowledged the criticism that the deal received but maintain that the New York market still holds great promise.
Jim Hagedorn pointed out that Riv Capital is currently sitting on almost $90 million in cash, but it only has a market cap of roughly $10 million.
In Talks
“So the audience of people who we’re talking to, we haven’t had anybody yet say no. The question is how do we do this so that we create a company that you would look at and say, holy f*ck,” Jim Hagedorn said. “I sat with those guys and they were giving me big time hints that there is going to be a consolidation here that’s sort of across the board that creates the best pot company in the United States.
“There are different permutations on how to get there. And these are conversations that are live right now,” he added.
Chris Hagedorn noted that in those conversations, they’ve been told, “We see the R&D you guys do. They look at it as there’s the tax-yielding, which is exciting because everyone’s looking for tax mitigation. Hawthorne has the highest possible quality produced at the lowest possible cost.”
The pair believe that cannabis will be rescheduled next year, which will release a lot of capital into the market. And with that there’s a lot of opportunity ahead for Hawthorne.
