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A Company that helps grow gardens (and Cannabis)

Scotts Miracle-Gro has been helping suburban gardeners keep their lawns green and pristine for decades. Now its unconventional, controversial CEO, Jim Hagedorn, with support from his billion-dollar family, is gambling $400 million to reach a burgeoning market of customers: Pot growers

Published: Aug 16, 2016 06:04:10 AM IST
Updated: Aug 11, 2016 05:14:43 PM IST
A Company that helps grow gardens (and Cannabis)
Image: Stephen webster for Forbes

Strapped into the pilot’s seat of his private jet, Scotts Miracle-Gro CEO Jim Hagedorn thrusts the throttle forward and hurtles down the runway, a typical start to the day for the former F-16 fighter pilot, who commutes 500 miles from his home on Long Island, New York to his office outside Columbus, Ohio. For an hour-and-a-half every morning and every ­afternoon, Hagedorn sits behind the control stick of his plane, pushes the seat back and lets his mind run wild.

His latest idea: “Invest, like, half a billion in the pot business,” he yells over the roar of two engines powering his camouflaged Cessna Citation. “It is the biggest thing I’ve ever seen in lawn and garden.”

No one has a better perspective on the lawn and garden business than Hagedorn, who, after watching his father build Miracle-Gro into a national brand, orchestrated its merger with Scotts in 1995 and took over as CEO of the combined company in 2001. Scotts Miracle-Gro, which makes almost all of its money selling grass seed, fertilizer, pesticide and dirt, boosted revenues by 80 percent from 2001 to 2009, riding on the coattails of Home Depot, Lowe’s and Wal-Mart as the retailers built more than 3,000 big boxes across the country. But then the Great Recession hit, and the rapid expansion stalled. Scotts Miracle-Gro’s sales have been stagnant ever since. That hit home for Hagedorn and his family, who collectively own a 27 percent stake that makes up $1.1 billion of their nearly $1.5 billion fortune. Frustrated with the flatlining business, Hagedorn fired more than half his management, shook up his board and gambled heavily on pot growers.

That controversial decision was made one day in 2013 in Yakima, Washington, when Hagedorn wandered into a garden centre. The store had hardly any Scotts merchandise, but there was a massive row of equipment for hydroponics, a method of growing that allows people to cultivate cannabis (or any other plant, for that matter) indoors, using targeted lighting and liquid solutions spiked with nutrients. Hagedorn asked to see the store owner, and out walked a short guy with wild hair and a lazy eye. He told Hagedorn that everyone called him an idiot when he first started selling hydroponics equipment, but the stuff was flying off the shelves, with an average receipt of $400—straight cash. It was a starkly different scene from what he’d just witnessed at a Home Depot across town, which had plenty of Scotts Miracle-Gro products but no hydroponics equipment. “Two worlds, same town. I came back, and I told everyone, ‘We’re doing it’,” Hagedorn recalls. “If you don’t like it, leave. We’re doing it. It’s beyond stopping. And we’re not getting into pot growing. We’re talking dirt, fertilizer, pesticides, growing systems, lights. You know it’s a multibillion-dollar business, and we’ve got no growth in our core. Are you guys stupid?”

Hagedorn is backing up his big talk with serious cash. He shelled out $135 million last year on two California-based businesses that sell fertilizers, soils and accessories to pot growers, recently spent another $120 million on a still-undisclosed lighting and hydroponics equipment company in Amsterdam and promises to invest about another $150 million by the end of 2016. Altogether, the deals are bigger than the largest single acquisition in the history of Scotts Miracle-Gro, which takes in $160 million of profit on $3 billion in sales annually.

“For a lot of conventional companies, I don’t think they’d want to take the risk,” says Hagedorn, a short, bald 60-year-old with sharp blue eyes. “I mean I’ve talked to some other friends and CEOs who basically shake their head.”

Among the dissenters is Carl Kohrt, one of six Scotts Miracle-Gro board members to step down in the past three years. “I’m not personally a supporter of the marijuana business,” says Kohrt. “Things change. Laws have changed. Interests have changed. Some personal values have not changed—mine included.”

Values aside, the drug industry is a legal minefield.

The federal government still labels cannabis as a Schedule I drug under the Controlled Substances Act, in the same class as heroin and LSD. But 25 states now allow medical marijuana, and four (plus the District of Columbia) have passed laws permitting recreational use. In 2013, the Obama Administration issued a memo deferring marijuana regulation to states, while at the same time reserving the federal government’s right to prosecute offenders in the future and challenge the states at any time (perhaps, say, if a new president is elected).

A Company that helps grow gardens (and Cannabis)
Image: Stephen webster for Forbes
Former F-16 fighter pilot Hagedorn often flies himself 500 miles by plane and 30 miles by helicopter from Long Island to his office in Ohio

Growing up, Jim Hagedorn thought business was boring. His father, Horace, a one-time Madison Avenue adman, co-founded Miracle-Gro in 1951 and spent much of his time on the telephone talking about numbers and marketing plans. Jim was a horrible student who didn’t care about his schoolwork but spent study halls going through encyclopaedias cover to cover.

His older sister Susan joined the Weathermen, a left-wing terror organisation that bombed the Pentagon and the US Capitol (she was not involved in either). After she was arrested for conspiracy to commit arson during a riot in Massachusetts, Horace Hagedorn headed north from Long Island to try to get his daughter off the hook. (She ended up serving two years’ probation.) While Horace was gone, Jim, then 15, threw a massive “pot party”, as he terms it, inviting over hordes of young people to get high. His father returned earlier than expected, walked into the ongoing party and burst into a fit of rage. Fearing for his safety, Jim called the police. (“As bad a kid as I was, he never hit me. I thought he was going to kill me this day,” he recalls.) The cops arrived at the door, and when Horace went down to answer it, Jim walked out of the house. He didn’t return for another two years.

Hagedorn lived on radical communes, surrounded by guns and drugs. He and his gang of friends stole anything they wanted as their lives spiralled out of control. “Did I do drugs?” Hagedorn asks rhetorically. “I didn’t do heroin—I viewed heroin as a drug that poor addicts use—but when it came to hallucinogenics and speed and marijuana, cocaine. Hell, yes.”

After a girlfriend broke his heart, he stumbled home to try to piece his life back together. His father made a donation to a boarding school in Vermont, and the school admitted Jim, by then 17, to its freshman class. Not long after, Hagedorn decided he wanted to be a professional pilot and headed to Embry-Riddle Aeronautical University in Daytona Beach, Florida. After enrolling, he took the Air Force Officer Qualifying Test, a military version of the SAT. To his surprise, he nearly aced the exam and the school offered him a full ride. Hagedorn’s father had promised all his children that if they earned scholarships, he would give them half of what they saved him. Hagedorn took the money and bought a BMW 5 Series.

Six months into flight training, an Air Force major stared down 30 students. “I want everybody who wants to kill people to sit on one side,” Hagedorn recalls him saying. “And I want everybody who is going to fly the killer’s toilet paper around to sit on the other side.” The major walked up to him and asked him to choose his fate. Hagedorn wanted only to be an airline pilot; he was certain the aerobatics of flying fighter jets would make him sick. But so did the idea of being subservient to anyone. “Kill people, sir,” he answered. He flew fighters for seven years during the Cold War. In 1987, Hagedorn left the Air Force as a captain and interviewed at his family’s business, where his father asked him what role he saw himself taking at the company. He responded by saying there was only one job that he wanted—his father’s. Hagedorn was willing to learn the ropes for a few years, as long as he didn’t have to work in sales. His dad hired him and immediately threw him in the sales department.
In 1994, SC Johnson offered the Hagedorn family $400 million in cash to buy Miracle-Gro, and Jim, by that time an executive, came up with a counter-move. What if, instead of selling to the consumer products giant, he proposed a merger with Scotts, a sleepy Ohio business that was six times the size of Miracle-Gro but had slim profits and a market capitalisation of only $300 million. On January 26, 1995, Scotts, run by professional management and owned by institutional shareholders, and the much smaller Miracle-Gro merged in a deal that valued Hagedorn’s company at $195 million. It was less than half the price SC Johnson offered, but there was potential upside. In this deal, Jim and his family took their entire payment in equity and warrants, giving them a 41 percent stake in the merged company. Soon after the agreement closed, the Hagedorns learnt that Scotts’ management team had been inflating sales figures. The company had to restate its earnings in 1996, and the Hagedorns moved to boot the old management team, replacing them with Miracle-Gro folks, including Jim. Five years later, he took the top role himself.

A Company that helps grow gardens (and Cannabis)
Image: Stephen webster for Forbes

The Hagedorns kept looking for ways to take down competitors or, if that was not possible, to ally with them. In 1998, Scotts Miracle-Gro struck a $32 million deal to sell Monsanto’s herbicide Roundup and a $300 million agreement for pest-killer Ortho. (Today Ortho does nearly $300 million in revenue, and Roundup brings in $70 million in net profit annually.) The next year Hagedorn shelled out another $350 million to acquire lawn and garden companies in the United Kingdom and new markets like France, Germany and The Netherlands. By 2009, Scotts Miracle-Gro controlled more than half of the market in consumer pesticides, fertilizers, soils and grass seeds.
Hagedorn compares the lawn and garden business to warfare. “Oh, dude, in a lot of ways, I think it’s better,” he says. “Today the way wars happen, you don’t get to keep all the stuff. To me this is one where in commercial combat you kind of rape and pillage, and you keep all of the stuff.”

That’s Hagedorn. Wildly offensive, hard-charging and, as even those who detest him admit, deceptively smart. He flies a plane named F-Bomb, draws business lessons from Osama bin Laden (“a massive piece of crap” but “a visionary”) and compares himself to the protagonist in the Showtime series Billions (“so focussed on winning that he’s a little bit of an animal”).

There is a softer side. Just ask him about his family. From 1995 to 2007, Hagedorn flew back to Long Island every weekend to see his wife and three kids but spent most of his time in Ohio. After his daughter died in 2007, he started commuting back and forth every day so that he could be home for dinner every night. He typically flies with no one but his German shepherd, Scout, who rides on a built-in dog bed next to Hage­dorn’s seat in the cockpit.

“There’s not another Scotts, and there’s not another Jim Hagedorn,” says Mark Baker, a former president of the company. “He is intense. He’s very smart. He’s sometimes exuberant, sometimes brutal—all in the same sentence, same day, same minute.”

Hagedorn’s temperament has gotten him in trouble before. In 2011, he told a Wall Street Journal reporter off the cuff that he wanted to target the medical marijuana market. When the story hit the press, Scotts board members were shocked—both by the idea (which they immediately shot down) and the fact that Hagedorn had told a reporter about it before telling them.

Two years later, the board was in turmoil for a different reason. On June 3, 2013, Scotts Miracle-Gro announced the resignation of three directors and explained the departures in an awkwardly worded SEC filing. All three had resigned “following a unanimously-supported reprimand of Hagedorn that stemmed from the use of inappropriate language,” the statement said, but none of the departures were “related to any disagreement relating to the company’s operations, policies, practices or financial reporting.”

Although the details of what exactly occurred remained secret for years, even to Scotts’ employees, the abrupt resignations of three board members certainly raised eyebrows. “They were the three strongest and the three most willing to challenge Jim,” says one former senior executive.

A Company that helps grow gardens (and Cannabis)

In reporting this story, Forbes uncovered publicly for the first time what actually happened. While discussing the movie Django Unchained with a newly hired African-American employee, Hagedorn repeatedly said the N-word, which is frequently used in the film. After receiving a complaint, the board of directors launched an investigation. The inquiry expanded into a larger review of the “tone at the top” of the organisation, sparking a war among board members. In the end, the board issued Hagedorn a unanimous reprimand, but he remained CEO. The African-American employee at the centre of the episode left Scotts Miracle-Gro and was paid undisclosed millions as part of a severance package that included non-disclosure covenants. Contacted by Forbes, she declined to ­comment.

“The catalyst for this whole problem was me,” Hagedorn says. “I get that. I’m not super-apologetic about what happened. I wouldn’t do it again.”

The incident left the board less independent than it had been. Six members have left since 2013 and only four new directors have joined Scotts, shrinking the board from 12 people to 10, including Hagedorn, who serves as chairman, and his twin sister, Katherine Hagedorn Littlefield, who is vice chairman.

“I want to respect the board,” Hagedorn says. “I don’t feel like I have to get a lot of s*%# from the board.”

Back on Long Island, just minutes from the Hagedorn family compound, sits the command centre for Scotts’ marijuana mission, set up in a nondescript white block building. The only sign that anyone of consequence is inside is the 1967 pastel-yellow Alfa Romeo convertible sitting outside. It belongs to Jim’s 31-year-old son, Chris, who is charged with turning his father’s wild idea into a reality.

A Company that helps grow gardens (and Cannabis)
Twenty-seven years after dad Horace (in portrait) gave him a job at Miracle-Gro, Jim Hagedorn installed son Chris as head of his own subsidiary

If the Hagedorn family didn’t own 27 percent of Scotts Miracle-Gro, Chris would not have his current job as president of subsidiary Hawthorne Gardening. When he was a teenager, he read an article explaining how the first generation typically creates a family business, the second generation expands it, and the third ruins it. So he decided to stay away from Scotts Miracle-Gro. He studied history at Bowdoin College, where he was admitted with help from his father, who knew the president. After graduation, he spent three years in advertising, writing commercials for fast-food hamburgers, then quit to write a novel. He ended up playing a lot of videogames instead. Eventually he got married and, while riding in the cockpit on the way back from his wedding, gave in and asked his father about joining the company. Jim put him in the marketing department (which Chris didn’t like), then eventually switched him over to the unit that oversees hydroponics (which he found more interesting).

“As far as I was concerned, it was just a toe in the water, but [Jim] may have had other ideas,” says Alan Barry, who served on the Scotts board of directors from 2009 until his retirement in 2015. “This was Jim’s way of creating a job opportunity for his son. And it was small, and it would have no measurable impact on the company.”

Last year, Chris helped lead the $120 million acquisition of General Hydroponics, which proved to be a tumultuous deal. The day before the agreement was to be finalised, Scotts’ outside lawyers refused to sign off. Their problem: Even though General Hydroponics did not sell marijuana, its founder had been growing cannabis as part of a side R&D operation. Jim Hagedorn wanted to pay the founder a consulting fee to continue working on his research for Scotts Miracle-Gro. But the lawyers refused to go along with it. Seeing no other option, Hagedorn agreed to leave the research out altogether and wrapped up the deal. That legal team has not worked on any Scotts’ hydroponics deals since. Undeterred, Hagedorn recently paid $120 million for a 75 percent stake in an Amsterdam-based lighting and hydroponics equipment outfit.
If Hagedorn’s antics don’t get in the way, his pot strategy may prove to be a success. General Hydroponics and its sister company, Vermicrop, brought in just $50 million in revenues when Scotts bought them in 2015. Now part of Chris’s subsidiary, the two companies have already increased sales by more than 20 percent, roughly four times the growth rate of the rest of Scotts, and operating margins are on track to be about 30 percent higher than the company average this year. The core business has been performing better lately as well, with profits up by 50 percent since Hagedorn fired more than half of his management team in the last four years. Scotts Miracle-Gro shares have increased by 13 percent in the past year (versus –1 percent for the S&P 500).

This spring Miracle-Gro took its pot plan on the road. It began selling a new line of hydroponics equipment and soils called Black Magic (created by a scientist at the General Hydroponics office) in 141 Home Depot stores across Colorado and Washington (states where recreational pot is legal) and Michigan (where medical marijuana is legal). A bag of Black Magic costs $16, more than twice as much as typical potting soil. Vegetable growers may not notice much of a difference, and most wouldn’t bother paying the higher price. But one pound of cannabis is worth more than $2,000, meaning the calculus for growing weed is much different than it is for growing tomatoes. With that sort of math on his side, Chris predicts his division will someday be a billion-dollar business. The TV spot that launched Black Magic features tattooed growers working under neon lamps late at night to cultivate leafy greens. It first aired on April 20, the unofficial holiday for weed smokers everywhere.

There are plenty of other opportunities, too. Take pesticides. Since marijuana is still a Schedule I drug, the federal government has not approved any pesticides for use on the plant, so growers are using corn pesticides as a substitute. But production at marijuana facilities keeps getting shut down by authorities, who are fine with businesses selling weed in certain states but don’t want people smoking dangerous chemicals. Scotts Miracle-Gro is now working with state governments to secure federal registrations that will indicate which pesticides can be used safely on cannabis. The ultimate plan: Roll out a line of branded pesticides specifically designed for pot.

Hagedorn has not given up on growing his own marijuana, either. He is already looking into foreign markets like Israel, Canada and Jamaica, where Scotts might be able to legally set up labs to test its products and conduct cannabis research. Hagedorn’s most eye-opening idea: Someday expanding the company’s research on genetics into cannabis to create GMO marijuana. He says he is not ready to run that idea by the company’s directors—yet.

Still he’s got his hand firmly on the throttle. “I’m pretty dominant and forceful here,” he says. “I admit, I’m an acquired taste. There are certain people who would say, ‘I wouldn’t want Hagedorn going out with my daughter. I don’t like how he runs the business’.” None of that deters him.

(This story appears in the 19 August, 2016 issue of Forbes India. To visit our Archives, click here.)

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