Weed Kills: The Close Call That Nearly Wilted Scotts Miracle-Gro – Unraveling the Risks of Cannabis Investment

Weed Kills: The Close Call That Nearly Wilted Scotts Miracle-Gro - Unraveling the Risks of Cannabis Investment

The horticulture behemoth gambled $1.7 billion on lighting, nutrients, and other tools for cannabis cultivation—only to face a setback. However, CEO Jim Hagedorn and his son Chris are strategizing a triumphant return. Discover their blueprint to blaze past the competition.

On a crisp November day in Las Vegas, Jim Hagedorn, the CEO, president, and chairman of Scotts Miracle-Gro, expresses frustration. Despite nearly a decade of bold investments in the legal cannabis industry, which included spending $1.7 billion on the creation of the pot-focused subsidiary Hawthorne Gardening Company and acquiring various cannabis cultivation supply companies, Hagedorn admits to the venture’s failure.

Within the bustling environment of MJBizCon, the largest annual cannabis industry expo, Hagedorn hurls a booklet of rolling papers across the table, emphasizing the perceived value of their equity, particularly Hawthorne, managed by his son, Chris. The once-promising acquisitions in the cannabis industry that initially boosted Scotts’ stock from the mid-$50 range to over $60 a share have taken a toll. The company’s share price reached $244, but due to factors like oversupply, falling wholesale prices, federal tax challenges, and a lack of federal marijuana legalization, Scotts’ sales plummeted from $4.9 billion in 2021 to $3.5 billion in 2023, causing a 75% drop in share price.

Hawthorne, experiencing a 35% sales decline from 2022 to 2023 and a net loss of $48 million for the year, had to cut 1,000 jobs from its 1,300-person staff. The aftermath includes the closure of Luxx Lighting and disposal of $200 million worth of unsold inventory in a landfill, leaving the company essentially worthless, according to Hagedorn.

Wearing a National Rifle Association hat, Hagedorn candidly admits, “Look, pot almost took us down.” Despite the setbacks, he defiantly attends the cannabis conference in Vegas to deliver a resounding “fuck-you” to the industry, responding to critics and naysayers who mock Scotts for its failed pot investment.

In the eyes of cannabis investors, Scotts’ $1.7 billion expenditure is often ridiculed as one of the worst deals in cannabis history. The 2022 acquisition of New York-based cannabis cultivator and dispensary operator Etain for $247 million is particularly criticized, with some labeling it as an “ill-advised acquisition of a significantly over-priced” asset. Cannabis licenses in New York, now trading for a few million dollars, highlight the magnitude of the perceived misstep, compounded by the challenges in the state’s slow rollout and unlicensed weed economy.

Hagedorn says that there is one rule: Hawthorne and Chris need to get out of “Dad’s basement.”

However, the father-and-son duo, Jim and Chris Hagedorn, display resilience and humility in the face of criticism. During a November 2023 earnings call, Jim openly acknowledged the challenges, stating, “You can throw shit at us—we deserve it.” Nevertheless, they unveil a strategic plan to separate Hawthorne from Scotts, a move that triggered an 8% surge in stock value within a day. Their ultimate aim is to mold Hawthorne into the “Procter & Gamble of marijuana,” envisioning a sale to a publicly traded cannabis company such as Curaleaf, Trulieve, Green Thumb Industries, or Verano (although none of these companies commented on the matter to Forbes).

In its peak year of 2021, Hawthorne recorded $1.4 billion in sales and a $164 million profit. However, by 2023, sales dwindled to $454 million, resulting in a $48 million loss, with most of Scotts’ $2.6 billion debt attributed to Hawthorne. Jim emphasizes one crucial rule: Hawthorne must not remain within Scotts. He metaphorically phrases it as Hawthorne and Chris needing to move out of “Dad’s basement.”

Despite being a “detractor to [Scotts’] overall valuation,” Hawthorne holds intrinsic value, according to Matt Garth, Scotts’ CFO. Chris emphasizes the crown jewel—Hawthorne’s 40,000-square foot research and development facility in Kelowna, British Columbia. This facility, completed in 2021, serves as the hub for testing products, comparing them against competitors to enhance harvest yield, THC potency, and consistency. Chris envisions combining Hawthorne’s R&D assets with a cannabis company to create a fully integrated corporation, spanning from grow lights to retail stores.

The Hagedorns foresee a scenario where a cannabis operator acquires Hawthorne, offering a large minority stock position and board seats, aiming to “build something really fucking cool.” Chris anticipates that when federal law changes, and marijuana becomes legal in the U.S., major players from Big Alcohol and Big Tobacco might seek substantial deals in the cannabis market.

While the fate of the Hagedorns’ vision remains uncertain, not everyone is enchanted by the idea. Andrew Carter, a director at Stifel, acknowledges the inherent value in Hawthorne and its assets but remains skeptical about branding cannabis as a Procter & Gamble equivalent, citing the complexities and substantial investment required. Chris, however, remains undeterred, emphasizing the importance of preserving the family legacy and avoiding becoming “the complete fucking idiot who damaged the family legacy.”

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