Growing up on New York’s Long Island, Jim Hagedorn would watch TV and see reports of marijuana busts.
In the background, he’d sometimes spot bags of Miracle-Gro, the garden fertilizer invented by his father, Horace.
That recollection is particularly apt as the younger Hagedorn, now 59, considers plans for the company his father helped found, Scotts Miracle-Gro Co., the world’s largest maker of lawn-care products. This month, Scotts bought a leading supplier of hydroponics, a technology that allows indoor cultivation of everything from tomatoes to pot without soil.
In the future, Hagedorn said, he plans more acquisitions in the hydroponics field, potentially building a business that can generate revenue of $1 billion-plus a year as more U.S. states legalize recreational and medicinal use of marijuana.
“We want to take these high-growth businesses, consolidate the space and kind of legitimize it, without changing it,” said Hagedorn, a former F-16 fighter pilot who has been chief executive officer at Scotts since 2001. “These could be important businesses in America.”
Revenue growth in hydroponics is twice the average in the lawn and garden industry, he said in a telephone interview, with wider margins and year-round demand.
The timing may also be right for getting into pot.
Four states have legalized recreational use so far and 13 others may vote next year on whether to join them, according to Viridian Capital & Research, a marijuana-focused investment firm. Republican Senator Rand Paul of Kentucky last month introduced a bill to end the federal ban on medicinal use, four weeks before announcing his presidential candidacy.
If the momentum behind legalization keeps up, the prize for Scotts and other legit companies could be immense. While the U.S. has $2.5 billion of legal pot sales a year, illegal sales are as much as $60 billion, according to Viridian. That implies a potential market worth more than 20 times Scotts’ total revenues last year.
“Scotts can find themselves having the biggest growth they’ve experienced in decades coming from the nascent home-grow industry,” said Leslie Bocskor, a legalization advocate and the managing partner at Electrum Partners, a Las Vegas-based advisory firm focused on the legal cannabis industry. “It’s a very smart play.”
Cannabis is classified by the federal government as a Schedule 1 drug, meaning it’s considered among the most dangerous psychologically and physically, along with LSD and ecstasy. Hagedorn says the hydroponics business is strongest where state pot laws are the most favorable – California, Washington, Colorado and Oregon.
Hagedorn knows he needs to tread lightly. The pot industry is still comprised largely of small, independent players. They’re the kind of people naturally distrustful of large corporations such as Scotts.
“Do we need to be the big giant making a lot of noise in the space when we are just becoming part of the family?” Hagedorn said. “I think the answer is, quiet is good.”
Scotts said April 2 it bought closely held General Hydroponics Inc., which sells nutrients used in hydroponics, and a separate soil company for a combined $130 million.
It was the biggest acquisition in 16 years for Scotts, whose stock has gained 9.8 percent over the past year. The Standard and Poor’s Midcap Materials Index is up 2.1 percent.
General Hydroponics, which has about $40 million of sales, was founded almost four decades ago by Laurence Brooke. A hydroponics pioneer, he still sees the technology primarily as a tool to feed the world rather than a way to grow pot away from the gaze of law enforcement.
“The people who wanted to grow cannabis went to our technology because it is second to none,” Brooke said in an interview.
Hagedorn is also keen to point out that hydroponics is about more than marijuana. Much of the demand is from young, city dwellers who are setting up small hydroponic gardens to grow fresh, pesticide-free vegetables and herbs for their families, he said.
“To some extent you have to be agnostic about how people use the product,” Hagedorn said.
If the legalization movement stalls, Scotts can always fall back on the kind of customer satisfied with using hydroponics to cultivate lettuce, herbs and other produce, said Michael Swartz, an analyst at Viridian Capital.
“The downside is mitigated in the way this product is used for growing other things,” he said. “But the potential is high as the cannabis market loosens.”