Fertilizer giant Scotts Co. said Monday that it agreed to buy upscale garden tool and patio furniture retailer Smith & Hawken Ltd. for $58 million and planned to triple the company's size in the coming years.
Scotts said it planned to expand the market for Smith & Hawken's items by selling them at retailers such as Home Depot Inc. and Lowe's Cos., which already carry Scotts' Miracle-Gro plant food and Turf Builder fertilizers.
"The categories we're in today are about $3.5 billion," said Scotts Chief Executive James Hagedorn.
"If you include outdoor living, which would be outdoor furniture, tools, water and gardening, it's a $21-billion market, and we think the Smith & Hawken brand is the best brand to go into those categories."
Novato, Calif.-based Smith & Hawken, owned by DDJ Capital Management, a private investment company, sells its products at its 56 stores and through catalogs and the Internet. The chain is expected to post sales of about $145 million this year; Hagedorn said he expected to increase its annual sales to $500 million.
Investors and at least one analyst were initially cool to the deal.
"I'm concerned about Scotts moving into retail when they are a core consumer products company," said William Chappell, an analyst at SunTrust Robinson Humphrey in Atlanta.
"I was hoping that they would really focus on the consumer business, pay down debt and eventually initiate a dividend. Instead they're getting into a new business they are unfamiliar with."
He's also concerned that Scotts now will compete with its fertilizer customers, including Home Depot and Lowe's, for furniture and tool sales. Chappell, who doesn't own any Scotts shares, lowered his rating on the shares to "neutral" from "buy." SunTrust has an investment banking relationship with Scotts, he said.
Scotts shares fell $1.31 to $56.55 on the New York Stock Exchange.
Smith & Hawken was founded in 1979 by Dave Smith and Paul Hawken as a garden-tool company.
Hawken is an entrepreneur and author who urges companies to protect the environment by reducing their energy consumption. In 1998, professors at 67 business schools voted his book "The Ecology of Commerce" the top textbook on business and the environment.
Today the company employs about 850 people. Scotts said it planned to retain Smith & Hawken's management team.
The purchase, which Scotts expects to complete by Oct. 1, includes the assumption of $14 million in Smith & Hawken debt.
Scotts, based in Marysville, Ohio, said it would use its existing credit line for the purchase, which is expected to reduce 2005 earnings.