Scotts Miracle-Gro to acquire Sunlight Supply

MARYSVILLE, Ohio — The Scotts Miracle-Gro Company, a marketer of branded consumer lawn and garden as well as hydroponic growing products, has announced it has entered into a definitive agreement to acquire the assets of Sunlight Supply Inc. The transaction that will greatly enhance the ability of SMG’s wholly owned subsidiary, The Hawthorne Gardening Company, to meet the needs of the rapidly evolving hydroponic products marketplace, according to a press release.

The transaction will create a direct distribution model for Hawthorne that will service more than 1,800 hydroponic retail customers throughout the United States.

Hawthorne, which had 2017 sales of approximately $290 million, owns leading hydroponic brands such as Gavita, Botanicare, Can-Filters and General Hydroponics. Sunlight Supply is the largest distributor of hydroponic products in the United States. Within the last year, Sunlight opened a 350,000-square-foot distribution center in Vancouver, Wash., and has eight other distribution facilities across North America.

Among the many benefits of the transaction, according to the release, is that Hawthorne will possess the most technologically advanced supply chain in the hydroponic supply industry. By being able to ship directly, Hawthorne will have greatly enhanced relationships with hydroponic retailers, giving it greater visibility into current market trends, retail inventory levels and point-of-sale data that will allow it to operate more effectively.

“We are creating a game-changing moment for ScottsMiracle-Gro, for Hawthorne, the hydroponic products industry and the users of our products,” said Jim Hagedorn, chairman and CEO of ScottsMiracle-Gro. “Combining Hawthorne’s industry-leading product portfolio with Sunlight’s unparalleled distribution capabilities and complementary portfolio will benefit consumers and all stakeholders in the hydroponic marketplace. It reinforces our confidence in the future of this industry and takes Hawthorne to a new level as a business with unique competitive advantages.”

Transaction details and financial implications

In fiscal 2017, Sunlight Supply recorded sales of approximately $460 million and earnings before interest, taxes, depreciation and amortization (EBITDA) of approximately $55 million. On a combined basis, Hawthorne and Sunlight Supply are expected to have combined annualized sales of approximately $600 million. About 20 percent of Sunlight’s current sales come from distributing Hawthorne’s products and are therefore excluded from the annualized estimate. Additionally, both businesses are expected to see unit volume declines in 2018 due to a temporary disruption to the California marketplace.

In fiscal 2018, the transaction is expected to be dilutive by $0.30 to $0.40 per share on a non-GAAP adjusted basis. The dilution is attributable to the timing of the expected close of the deal, non-cash purchase accounting adjustments including amortization, increased deal costs, and increased interest expense.

Upon completion of the transaction, which is expected by June 1, the company is launching an initiative it is calling ‘Project Catalyst,’ which calls for Hawthorne to achieve no less than $35 million in financial synergies by the end of fiscal 2019. The company expects to incur approximately $15-20 million in restructuring charges to achieve those synergies. Benefits from the transaction are expected to improve year-over-year non-GAAP adjusted earnings by $0.60 to $0.80 per share in fiscal 2019.

The company has set a goal for Hawthorne to achieve segment profit of approximately $120 million and operating profit margin of 17 to 18 percent by the end of fiscal 2020.

“We have been deliberate in the steps we’ve taken thus far in creating the Hawthorne portfolio and made sure not to disrupt the marketplace as we’ve grown,” Hagedorn said. “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 and drives value for our shareholders.”

Terms of the transaction call for ScottsMiracle-Gro to pay $425 million in cash and $25 million in SMG equity to Sunlight Supply upon completion of the deal. The transaction, which is subject to regulatory approval, will be financed using the Company’s existing credit facility. ScottsMiracle-Gro expects to have a debt-to-adjusted EBITDA ratio slightly above 4.0 times at the completion of the transaction.

“We are extremely pleased with the financial terms of the transaction,” said Randy Coleman, chief financial officer for ScottsMiracle-Gro. “The synergies from combining the businesses makes the transaction even more financially attractive. However, purchase accounting adjustments, deal costs, and financing costs from the deal will trigger a leverage ratio higher than our previously stated goals. Because we believe a leverage ratio of 3.5 times is appropriate for our business, we will focus on returning to that level by the end of fiscal 2019. This will likely slow our share repurchase efforts for the next several quarters, although we have not changed our long-term commitment to return cash to shareholders.”

ScottsMiracle-Gro will release complete financial results for its fiscal second quarter on May 1 and expects to provide a detailed overview of the expected impact of the Sunlight Supply transaction on its 2018 financial guidance. The company currently expects it will announce that Hawthorne segment sales declined approximately 30 percent in the second quarter, including the impact of past acquisitions. The company also anticipates reporting a 5 percent decline in second quarter sales for its U.S. Consumer segment as extremely unseasonable weather has delayed the start of the lawn and garden season in many key U.S. markets.

“The entire hydroponic industry continues to see pressure on sales due to the recent regulatory changes in California,” Hagedorn said. “We now expect the challenges in California to continue throughout the balance of fiscal 2018. Because our long-term optimism about this category is unchanged, however, we see no reason for these near-term challenges to delay the implementation of our strategy.”

Combination creates benefits for the hydroponic growing supply industry

The combination of Hawthorne and Sunlight Supply will create immediate benefits for consumers, retailers, and vendors throughout the hydroponic products industry, according to the release. Upon completion of the acquisition, Hawthorne will have a fully vertically integrated operating model that will ship directly to retailers, providing unmatched capabilities in the industry. The company believes the transaction will make Hawthorne the preferred distributor for the majority of other manufacturers in this space.

Synergies from the transaction will allow Hawthorne to invest in improved service, more attractive promotional programs for its retail partners, as well as benefit consumers with unique R&D efforts to improve the effectiveness of hydroponic growing products, according to the release, according to the release.

“In deciding to join forces with Hawthorne we were seeking a partner who shared our long-term optimism for this industry and was focused on further improving the experience for our retail dealers and current vendors,” said Craig Hargreaves, founder and CEO of Sunlight Supply. “This is an innovative and smart combination that allows our industry to take a giant step forward and benefits consumers and all of Sunlight’s current stakeholders. We are truly excited to become part of the ScottsMiracle-Gro family and to partner with Hawthorne in creating the most important company in the hydroponic products industry.”

Business operations and leadership team

Hawthorne Gardening Co. will remain based in New York although significant operations will be consolidated in Vancouver, Washington, where Sunlight Supply is based and recently opened a fully automated manufacturing and distribution facility. Chris Hagedorn will continue to serve as general manager of Hawthorne. Doug Hargreaves, currently executive vice president at Sunlight Supply, is expected to be the lead of operations at Hawthorne upon completion of the deal. Craig Hargreaves is also expected to join ScottsMiracle-Gro in a highly visible capacity upon completion of the deal that allows him to influence Hawthorne’s long-term strategy.

“Craig and Doug Hargreaves are not just seasoned business operators, but are among the most respected people in the U.S. hydroponic industry today,” Hagedorn said. “Completing this deal was contingent on both of them joining our team. I welcome them and the entire Sunlight team as we begin this exciting new chapter.”

Wells Fargo Securities acted as financial advisor to ScottsMiracle-Gro in connection with this transaction.