One small step for Scotts Miracle-Gro Company (NYSE: SMG), one giant leap for the cannabis industry.
Earlier this week, Scotts sent shockwaves throughout the cannabis industry when it announced the creation of a new subsidiary, The Hawthorne Collective, to focus on strategic minority investments in verticals of the cannabis industry. The new subsidiary will focus on verticals of the cannabis industry that are not currently being pursued by Hawthorne Gardening Company and we are favorable on the growth prospects that are associated with the Hawthorne Collective.
This represents a major development for the cannabis industry due to Scotts being considered to be one of the world’s largest marketers of branded consumer products for lawn and garden care. For many years, Scotts has been considered to be one of the most attractive ancillary cannabis companies. Through the Hawthorne Gardening Company, the company has been a major beneficiary of the increasing demand for supplies to cultivate cannabis across the globe.
Invests $150 million in RIV Capital via a Convertible Loan
The first transaction by the Hawthorne Collective is a $150 million convertible loan to RIV Capital (TSX: RIV) (OTC: CNPOF), a Toronto-based cannabis investment and acquisition firm that trades on the Toronto Stock Exchange (TSX). The note has a six-year term and it accrues interest at 2.03% per year for the first two years. The strategic investment also includes covenants that provide the Hawthorne Collective with additional follow-on investment rights.
If the convertible is converted to stock, ScottsMiracle-Gro would own approximately 42% of RIV Capital (through The Hawthorne Collective). According to the terms of the strategic investment, Hawthorne Collective can nominate up to three members to RIV Capital’s Board of Directors (which will be increased to seven).
Despite the size of the convertible loan and the number of seats the business will have on the Board of Directors, Scotts and Hawthorne Collective will not have an active day-to-day role in RIV Capital nor the companies in which it invests. We are favorable on the passive approach the company is taking with the investments it plans to makes and will monitor how the story advances from here.
RIV Plans to use the Capital for Unique Growth Opportunities
According to filings with securities regulators, RIV Capital said it would use the funds for general corporate and other lawful purposes, which could include additional investments and acquisitions. Over the next year, we expect RIV to report significant developments and use the capital to make accretive investments and acquisitions.
Upon closing of the $150 million convertible loan (expected to close in the fourth quarter of 2021), RIV Capital will become The Hawthorne Collective’s preferred vehicle for making future investments that are not currently in the purview of The Hawthorne Gardening Company. We are favorable on this structure and will monitor how the business evolves over the next year.
Scotts Chairman and CEO Jim Hagedorn expects the initial transaction to have little near-term impact on financial performance. He also said that Scotts is confident that RIV Capital will ultimately drive meaningful value for shareholders over the long-term and are favorable on the strategy it has to execute on this.
An Industry Leader to be Aware of
The Hawthorne Collective will allow Scotts to pursue strategic investment opportunities in an industry that is poised for significant growth in the years ahead. The newly formed subsidiary has been designed to allow Scotts to eventually participate directly in a larger marketplace as the legal environment changes over time and we are favorable on the growth prospects that are associated with the changing landscape of the legal cannabis industry.
Based on the performance of the Hawthorne Gardening Company over the past six years, we are bullish on the potential value that can be created by the new subsidiary. The Hawthorne Gardening Company has already created significant shareholder value and it has allowed Scotts to develop a rare level of expertise and insight regarding the cannabis space without having to touch the plant.
If you are interested in learning more about the formation of Scotts’ new subsidiary, please send an email to email@example.com with the subject “The Hawthorne Collective” to be added to our distribution list.
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