Chief Executive Officer Jim Hagedorn is making the company’s largest-ever transaction as he continues his three-year transformation of Scotts, the largest maker of lawn and garden products, into a force in the cannabis industry.
Nine states and the District of Columbia now allow recreational pot use, and the industry is expected to reach US$75 billion in sales by 2030 as more legalize marijuana, according to Cowen & Co.
Scotts agreed to pay US$425 million cash and US$25 million in shares for closely held Sunlight Supply Inc., the Marysville, Ohio-based company said in a statement Tuesday. Sunlight will merge into Scotts’ Hawthorne Gardening Company unit.
“We are creating a game-changing moment for Scotts Miracle-Gro, for Hawthorne, the hydroponic products industry and the users of our products,” Hagedorn said in the statement. The deal is expected to close by June 1.
Deal costs
Costs associated with the deal are expected to reduce earnings by 30 cents to 40 cents a share in fiscal 2018, Scotts said. Sales in the three months through March fell about 30% at Hawthorne because of regulatory changes in California, and about 5% in the US consumer segment, the company said.
Scotts shares were largely unchanged in after-market trading, after closing higher Tuesday at US$85.14.
The combined company would serve 1,800 hydroponic retail customers in the US Sunlight has nine distribution facilities across North America.
The deal will boost sales in Scott’s Hawthorne Gardening subsidiary to about US$600 million, from US$290 million, the company said. Sunlight’s sales last year were about US$460 million, with 20 percent coming from distributing Hawthorne’s products. The company generated about US$55 million in earnings before interest, taxes, depreciation and amortization.
“The pending acquisition of Sunlight Supply now gives us the green light to aggressively optimize the businesses we’ve acquired and create a more efficient business that better serves the needs of consumers and our customers,” Hagedorn said.
Scotts previously acquired hydroponic brands such as Gavita, Botanicare, Can-Filters, and General Hydroponics.
By fiscal 2019, the transaction should add 60 cents to 80 cents a share to adjusted earnings, including plans to cut costs at Hawthorne by about US$35 million. Scotts said it plans to boost Hawthorne profit to about US$120 million with margins of 17% to 18% by the end of fiscal 2020.