Scotts Miracle-Gro aims to break up with Hawthorne as growth prospects dim | How to buy Skittles Moonrock online

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Scotts Miracle-Gro Co.’s (NYSE: SMG) leadership team is finally unified behind plans to separate its Hawthorne cannabis unit, with first steps possible within the next couple months, executives announced during a Wednesday earnings call.

The decision is a reversal for CEO Jim Hagedorn, who previously defended keeping the now-profitable division within Scotts despite its volatile nature. But with Hawthorne projecting just $20 million in EBITDA this year – what Hagedorn called “relatively small beer” during the call – the company’s leadership concluded that the unit would fare better as a stand-alone cannabis business.

“This is not like we’re looking to get rid of it,” Hagedorn told analysts. “We’re looking to focus our investments in the best configuration possible for our shareholders.”

Hagedorn alluded to tension around Hawthorne’s performance targets versus the company’s own calculations. “It’s a bigger number than … our strategic plan numbers, meaning that I think it’s going to be hard work for them to get to a number that I would find respectful,” he said.

Hawthorne has been showing signs of stabilization, albeit at lower levels. Revenue fell 35% to $52 million in the fiscal first quarter, though executives said the decline was expected following last spring’s exit from lower-margin distribution operations.

When pressed about logistical hurdles that stymied previous separation attempts, Hagedorn said the decision followed long internal discussions and has unanimous buy-in from management.

“I wanted my entire leadership team to say, ‘Do you guys all agree?’ Because it’s not just that I agree and a couple of our advisers (agree),” Hagedorn said. “They said yes.”

A spin-off could help insulate Scotts from cannabis industry volatility while providing Hawthorne with tax benefits and expanded credit access, he said. External advisers convinced Hagedorn the unit “could be so much more valuable in a pure pot business than it could be with us.”

Scotts also recently restructured its cannabis investment portfolio. The company converted its previous stake in RIV Capital to non-voting shares in Cansortium (CSE: TIUM.U) (OTCQB: CNTMF), recording a $7 million non-cash loss after RIV merged with the Florida-based operator to take on New York last month.

Chris Hagedorn, who heads Hawthorne and recently became executive vice president and chief of staff, would continue leading the unit post-separation while maintaining “formal relationships” with Scotts, Him Hagedorn said.

Management plans to seek board approval and begin bank talks soon, with Hagedorn hinting that initial asset moves could happen “as soon as a month or two.” Executives said the separation wouldn’t impact Scotts’ fiscal 2025 targets, though they provided few details on timing or structure.

The announcement adds another chapter to Scotts’ complicated cannabis journey. The company entered the space through Hawthorne in 2014, building it into North America’s largest hydroponics supplier through acquisitions. But the business struggled as state-licensed markets matured and wholesale prices fell.

“Moving Hawthorne out of Scotts Miracle-Gro is better for everyone,” Hagedorn said. “We and our banks think it would make it more clear what our equity represents and could expand our price-to-earnings multiple.”