December 8, 2016

As the company continues to expand within the legal marijuana space, ScottsMiracle-Gro announced it has lifted its stake in hydroponics company AeroGrow International Inc. to 80 percent through its wholly owned subsidiary, SMG Growing Media Inc., for $47.8 million.

ScottsMiracle-Gro made its initial investment in AeroGrow, a producer of an automated soil-free indoor growing system in 2013, when it acquired a minority stake in the company for $4.5 million. For its fiscal year 2016, which ended in March, AeroGrow posted sales totaling $19.6 million, followed by a 65 percent increase in sales for the first half of FY2017, leading to estimates that the company will see sales of close to $35 million by the close of the full year.

Miracle-Gro Targets Marijuana

Between 2001 and 2009, Scotts saw its revenues increase by 80 percent as giant retailers including WalMart, Home Depot and Lowe’s expanded across the U.S., building more than 3,000 stores. However, with 2008 came a widespread economic slowdown, then recession that has since stalled Miracle-Gro’s growth.

In response, Jim Hagedorn, CEO of ScottsMiracle-Gro since 2001, decided to re-energize his company and counter flat sales by investing in the legal cannabis production industry, pledging to invest $150 million in the sector by the end of 2016 toward a total goal of $500 million.

Tagged as a growth sector, the marijuana industry as a whole has been growing at almost 34 percent per year for the past five years and is expected by IBISWorld to reach a value of $13.4 billion by 2020.

During its first full year of legal medical and recreational marijuana sales, the state of Colorado saw sales of more than $700 million in 2014.

However, in the most significant development for the industry since 2012 when Colorado and Washington voted to legalize the recreational use of marijuana, voters in Massachusetts, California, and Nevada passed a measure on November 8 legalizing recreational marijuana, while Florida, North Dakota, and Arkansas voted to legalize medical marijuana.

The measure’s passing in California not only legalizes the recreational use of marijuana in the most populous state in the U.S. accounting for 12 percent of the country’s population but creates a legalized “corridor” along the entire west coast of the country. Meanwhile, the Massachusetts vote gives legal marijuana its first victory in the crowded Northeast region.

“This is a huge year for the industry,” Jessica Rabe, an analyst at Convergex in New York told CNBC. “The fall election will be very important in terms of the trajectory of where the industry goes and how quickly legalization happens in this country.”

This momentum, now backed by further legalization is creating an investment class that is gaining traction with serious investors such as ScottsMiracle-Gro, who are vying for early entry into a sector that is estimated to be worth $13.4 billion by 2020.

The Deal

Under the terms of the deal with AeroGrow, 21.6 million shares of AeroGrow were issued to ScottsMiracle-Gro in exchange for $47.8 million. Of this total, AeroGrow announced that $41 million has been declared by its Board of Directors for distribution payable January 3, 2017, while another $5.25 million will be used to repay ScottsMiracle-Gro for a previously made operating loan.

Along with the majority ownership, ScottsMiracle-Gro will gain three seats on the five-member AeroGrow Board, while Michael Wolfe will remain in his position as president and CEO of AeroGrow.

“When we first signed our deal with The Scotts Miracle-Gro Company in April of 2013 I described that as a transformational event for AeroGrow. That transformation continues now with another red letter day for our company,” said Michael Wolfe.  “We’ve come a long way over the past three years — effectively tripling our business, significantly improving our bottom line, greatly expanding our distribution and launching a series of innovative new products.”

Wolfe goes on to say that the company will use the fresh capital gained through the transaction to fund the expansion of its existing distribution channels, to open new markets in both North America and overseas, to increase advertising media for greater brand awareness, and to develop new products.

“I couldn’t be more excited for our future and the opportunities that this creates for AeroGrow,” noted Wolfe. “We stand poised — and well-funded – to seize the opportunities created by our highly innovative and expanding technologies.”

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Lynda Kiernan