The acquisition of New York medical cannabis operator Etain by Riv Capital is entering another messy chapter. Scotts Miracle-Gro (NYSE: SMG), owner of the hydroponic company Hawthorne, has filed a lawsuit against Jason Wild and TerrAscend (OTC: TRSSF) claiming they ruined its $175 million investment.
Law360 reported the case was filed on Monday in a New York Federal court.
The Hawthorne Gardening Company and The Hawthorne Collective Inc., as stated in the complaint, made an investment in RIV Capital Inc. (OTC: CNPOF) to buy cannabis companies. Hawthorne gave $175 million in capital to support RIV’s business and got three board seats as part of the deal.
In March 2022, Riv said it was buying the female-owned Etain. However, the complaint states that TerrAscend also wanted to buy Etain and happened to own 20% of Riv Capital.
Hawthorne is complaining that Wild fought Riv Capital’s plans to buy Etain asking the board to call off the deal and threatening to attain a hemp license in the state. Since adult-use cannabis operators can’t be verticle, that meant Riv would not be able to have both Wild’s hemp license and also own Etain. The company claims Wild also asked that his plans remain confidential. The complaint also alleges that Wild tried to get the board changed such that the Hawthorne members would be removed for more friendly members. Although it was noted in the complaint that JWAM (Jason Wild Asset Management) initially voted in favor of adding the Hawthorne board members.
Defendant JWAM, RIV Capital’s largest shareholder, is trying to disrupt the Etain deal and Hawthorne’s relationship with RIV for Defendant TerrAscend’s benefit.
It seems this battle has been brewing internally for some time. The complaint says that starting soon after the acquisition was announced, Wild began fighting for the deal to be terminated. By June 2022, Hawthorne was sending letters to JWAM and Wild about their alleged interference in the deal. Still, the deal went forward and was closed in December 2022.
Originally Riv Capital said it was buying Etain for $247 million but later paid $198 million. The price seemed appropriate when it looked as if the original 10 medical license holders would be first in line to get adult-use licenses. However, the New York Office of Capital Management (OCM) threw cold water on those plans when it pivoted and put social justice applicants at the head of the line. The OCM also changed the adult-use program to cut out the vertical operators – meaning that Etain was now stuck on the medical side. It also came to light that Etain’s revenue was much lower than many had thought.
Hawthorne had initially fronted $150 million to Riv but added another $25 million at the closing. The company also has big plans for expansion. The complaint stated, “RIV Capital plans to invest in four new dispensaries. RIV Capital plans to support Etain’s expansion of its Chestertown, New York cultivation and production infrastructure, which it expects to be completed by the second quarter of 2023. RIV Capital also plans to support the construction of a new state-of-the-art indoor cultivation facility in Buffalo, New York.”
Hawthorne states that Wild’s value in Riv Capital is only worth $4.4 million versus its $175 million investment. The complaint also states that TerrAscend’s stores are located near the New York state line and that Wild had tried unsuccessfully to get a New York license. The court filing also states that JWAM has a conflict of interest by owning stakes in two competing companies TerrAscend and Etain. They claim this is anti-competitive.
In December, shortly after the transaction closed, Wild asked for a special meeting to replace five of the seven directors on the board. At the heart of the dissatisfaction was the price paid for Etain. In the statement, the investors said that Riv “pushed ahead with an ill-advised acquisition of a significantly overpriced New York asset when all signals in the marketplace were flashing caution. The company made the questionable decision to sign and close on this egregiously overpriced asset, a transaction riddled with major uncertainties, ignoring repeated arguments from the Concerned Shareholder to abandon the transaction or at least lower the valuation ascribed to a New York cannabis license.”
The disgruntled investors said, “The total consideration paid by the company was equal to over three times the value of any prior New York license acquisition – a valuation made even more indefensible in light of the material ongoing declines in value for publicly traded cannabis companies and the high level of uncertainty surrounding the New York cannabis market regulatory structure.”
At the end of November, RIV announced it had taken a $138.9 million write-down on the acquisition, based on updated cash flows and “to account for the enhanced risk and uncertainty attached to the New York market,” the company reported at the time. Still, Riv Capital leadership remained optimistic about the deal. The board also gave itself a raise despite the writedown and voted to increase the annual retainer compensation for nonemployee directors for 2023 from $120,000 to $225,000. The latest Etain revenue was reported at just $3.4 million for six months ending in September 2022.
Recently, Scotts CEO Jim Hagedorn spoke about the New York market on the company’s earnings call saying “New York has tripped over itself in developing and implementing rules, which has prevented the market from reaching its near-term potential,” he said. “But let me make this clear, New York will become a monster market, and we will see it through.” Hagedorn insisted there was progress in the value of the investment with RIV.
Hawthorne wants the court to stop JWAM and Wild’s attempt to change the board at Riv Capital and to stop trying to unwind the Etain acquisition.