Scotts Miracle-Gro (NYSE: SMG) followed up on previous disclosures regarding its investment in AeroGrow International (OTC: AERO), taking control of the Boulder-based company by exercising warrants it held and also converting preferred shares into common stock. The company issued a press release describing the move that required a net investment of approximately $9mm, while AERO explained the transaction in a press release, an 8-K filing , a Form 4 and an amended 13D filed with the SEC. SMG first invested in AERO in 2013.
AeroGrow sells the AeroGarden, an automated soil-free indoor garden that many consumers use to grow cannabis at home. In Fiscal 2016, which ended in March, AERO reported sales of $19.6mm but an operating loss of $1.3mm and a net loss of $1.228mm. In the first half of FY17, sales have increased by 65% to $4.4mm during the seasonally slow time of the year (Q3 and Q4 are the big quarters due to holiday sales). At this rate of growth, the company could produce sales of close to $35mm in FY17. The company hasn’t mentioned cannabis in any of its SEC filings or recent conference calls, so it’s not clear how much of their business is actually related to cannabis.
The transaction included the exercise of warrants that allowed SMG to acquire 80% of the company’s common stock based on a multiple of trailing sales. SMG Growing Media, a subsidiary of the company, acquired 21,613,342 shares for almost $48mm ($2.21 per share). Previously, it held 2.4mm shares and also exercised 2.649mm Series B Convertible Preferred shares, giving it 81.2% of the Aerogrow International with 26.66mm shares in total now. AERO will pay a one-time dividend of $1.21 per share, which will reduce net outlay by SMG by over $32mm. Additionally, AERO will repay debt to SMG in excess of $5mm.
SMG continues to build out its exposure to the growing legal cannabis industry. In addition to its 81% stake in AERO, the company has acquired General Hydroponics, Gavita Lighting and Botanicare, a nutrients provider. The company is likely to spin out its The Hawthorne Garden Company, which manages each of these companies.