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>>> Scotts Miracle-Gro still believes in cannabis' future. Here's how it plans to be a part of it.


The Etain marijuana dispensary in Manhattan. Riv Capital, backed with debt financing from a Scotts Miracle-Gro subsidiary, acquired Etain this year. New York state is expanding to adult recreational use from medical marijuana; sales could start by year's end.


By Carrie Ghose

Columbus Business First

Nov 11, 2022


https://www.bizjournals.com/columbus/news/2022/11/10/scotts-miracle-gro-cannabis-future-hathorne-riv.html?utm_source=sy&utm_medium=nsyp&utm_campaign=yh


Scotts Miracle-Gro Co. took a bruising from this year’s tumult in the U.S. marijuana industry, but the company is investing even more in a shot at eventual part ownership of a major consumer cannabis brand when federal prohibition ends.

The Marysville lawn and garden company has invested $175 million via convertible notes in Riv Capital Inc., and has an option to lend more. With a handful of former Scotts executives in top leadership, the Canadian firm is in the process of acquiring a cannabis company in New York, where recreational use is about to begin.

“We looked at the future of the industry,” Scotts CEO Jim Hagedorn told Columbus Business First. “Branded consumable products is where the money is going to be.”

Scotts (NYSE: SMG) supplies marijuana growers and indoor agriculture through its Hawthorne Gardening Co. subsidiary, which it built through $1.4 billion in acquisitions over the past eight years.

It’s the difference between owning a hops farm or Anheuser-Busch, said Chris Hagedorn, Scotts executive vice president and Hawthorne’s president.

Riv, based in Toronto, was formerly an investment arm of Canopy Growth Corp., separated in a divestiture last year.

The debt financing structure through a subsidiary keeps Scotts at legal arms’ length while cannabis remains federally outlawed, but the notes can convert to shares once the ban lifts – a maximum 49% stake depending on how much more it lends. Scotts also names four of seven board seats, including Chris Hagedorn.

“I think we’re the first ones to structure it the way we did,” Chris Hagedorn said in the joint interview with his father.

“We don’t control the business,” he said. “We have been able to seed some of the management team with former Scotts people.”

Mark Sims, also a Riv director, joined as CEO in March after almost 15 years at Scotts, most recently as senior vice president for strategy and mergers and acquisitions.

Other leaders that migrated from Scotts: COO Mike Totzke moved over in June after 17 years, most recently as a Hawthorne team lead, and is in charge of growing the New York business. Frank Tice, legal director, had been on the legal team advising Hawthorne. Amanda Rico, a Scotts vice president of human resources, joined Riv as HR chief last month.

Sims’ appointment marked a major strategy shift: Instead of a venture capital investor in Canadian cannabis growers and suppliers, Riv is getting directly into the business of growing and selling cannabis in the United States.

Riv achieved its goal of early entry into a high-population state where the market is about to grow quickly, Chris Hagedorn said. The company has closed the first phase of a $247 million cash-and-stock acquisition of Etain LLC and Etain IP LLC, which operate the full spectrum from cultivation to dispensaries in New York. It started in medical marijuana and will expand with recreational use.

Riv also is building a new 75,000-square-foot cultivation facility in Buffalo – with supplies and design consulting from Hawthorne.

Publicly traded tobacco companies have made similar moves, but most large consumer-facing companies have stayed out of the industry.

Optimism for Riv follows a rough year for Hawthorne. Oversupply in state marijuana markets, especially California, caused growers to pull back and Hawthorne sales to drop by half to $716 million. The division with an 11.5% operating margin last year had a full-year operating loss of $21 million in fiscal 2022.

Hawthorne cut hundreds of jobs, is closing distribution centers to consolidate with Scotts facilities and is shutting down product lines, including a lighting brand it acquired in December.

Accounting write-offs on several acquisitions led Scotts to its first annual net loss since 2008, and overall company sales dropped by $1 billion from a record 2021 to $3.9 billion.

A patchwork of state regulations and onerous tax structures have plagued the cannabis industry. Jim Hagedorn on investor calls has taken responsibility for misjudging how slowly a Democratic president and Congress would move on ending federal cannabis prohibition.

As part of cost-cutting this year, Scotts Miracle-Gro sold and leased back its Hawthorne subsidiary’s headquarters in Vancouver, Washington.

Industry advocates are hoping at least the Safe Banking Act can pass in a lame duck session, allowing state licensed operators to access banking and creating momentum for more profound reforms.

“I hope Sen. (Chuck) Schumer (the Senate majority leader) is good for his word when he says we’re close,” Chris Hagedorn said.

Scotts first invested in Riv in August 2021 through a subsidiary. Analysts have complained about the investment, Chris Hagedorn said.

“It’s not going to make money yet,” he said. “That business is on track. I’m extremely excited about the prospects of that business.”

And he is equally confident of the future for the original Hawthorne business, because of the future of the marijuana business.

“There’s no use case question here. Will Americans adopt cannabis usage? They did that a long time ago,” Chris Hagedorn said. “There is a healthy, profitable business to be had. Changes are necessary, and we are making them now.”

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