You’re reading this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news. We no longer send these by email as we did in the past, but we post this and all of the newsletters on our website here.
Friends,
This week, the largest stock in the Global Cannabis Stock Index by market cap, Scotts Miracle-Gro, announced that it has found a buyer of its Hawthorne Gardening Company business in Vireo Growth. This news first hit in an online article published by the Wall Street Journal, and then Vireo issued a press release as did Scotts Miracle-Gro, which also reported its fiscal Q1.
The deal is not a done deal. Vireo termed it a “non-binding memorandum of understanding” but did not discuss the terms of the deal or when it might close. Scotts Miracle-Gro, which had already told investors it was working on this type of transaction, did not report Hawthorne financial results for Q1. The analysts did not really ask any questions about it during the conference call. The WSJ article stated that Vireo was giving Scotts Miracle-Gro 13% of its shares in exchange, but neither company has stated that in their press releases or in an SEC filing.
I include SMG on my 420 Investor Focus List, but Vireo is not a member of that group. Vireo also has failed to qualify for the Global Cannabis Stock Index due to its low trading volumes. As I detailed five weeks ago, Vireo has gotten very large in terms of revenue and its geographical focus. The stock was then at $0.625, but it is lower now, closing at $0.55. The decline since Christmas Eve has been 12.0%, while MSOS has dropped 10.1%.
Perhaps investors care about this transaction, but I don’t. First, it is not a done deal. Second, to buy Hawthorne, an investor has to assume 280E taxation risk. Third, the price seems high, as 13% of the company is worth about $75 million. Fourth, it is not clear to me that marrying an ancillary company with a cannabis operator makes sense, as I remember TILT Holdings.
I have followed Hawthorne Gardening for a long time, and am glad that CEO Hagedorn and his team stepped up and bought it and expanded it. The cannabis industry has been struggling for about five years, and the big decline in the revenue of Hawthorne Gardening is not the fault of SMG in my view. It’s not clear to me how Vireo Growth will make it a better operation, but hopefully it has a good plan.
I continue to believe that investors should pay a lot of attention to what is going on with the stock at Vireo. This potential acquisition was not anything that had been discussed by analysts or investors, yet today’s volume of 277k shares was very low. Again, Vireo, through its aggressive M&A activity, has become the 7th largest MSO on the NCV Revenue Tracker. It remains very concerning to me that the stock doesn’t get much interest.
Sincerely,
Alan
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