In Hydrofarm IPO, Investors Seek Pot Growth Without the Pot

Hydrofarm Holdings Group Inc.’s initial public offering topped the company’s own pricing expectations, showing just how much investors want a piece of the cannabis action — but without the actual cannabis.

Trading on Thursday started at $46 a share, well above the $20 price set in Wednesday’s offering.

The maker of hydroponics equipment has benefited from growth in the marijuana market, which accounts for as much as 70% of Hydrofarm’s end users, according to Chief Executive Officer Bill Toler. And since the 43-year-old company doesn’t actually “touch the plant” — investor-speak for businesses that keep a distance from the marijuana itself, thus avoiding legal concerns — Hydrofarm has drawn interest even from large institutional backers.

“The marijuana stigma has gone the other way — there’s more interest,” Toler, the former CEO of munchies-maker Hostess Brands Inc., said in an interview. Hydrofarm offers investors a “picks and shovels play” that isn’t tied to the success of any one cannabis brand or retailer, he added.

The public debut comes just weeks after five more U.S. states voted to legalize cannabis and only a few days after the House of Representatives passed legislation to legalize marijuana at the federal level. While the latter bill isn’t expected to pass the Senate, an incoming Democratic presidential administration has lifted hopes in the industry that U.S. legalization isn’t far off.

That enthusiasm buoyed Hydrofarm, which surpassed expectations in itsinitial pricing. The company raised about $173 million in proceeds from Wednesday’s offering, after saying earlier that it expected as much as $159.3 million and an initial price of $17.50 a share. Funds raised will be used to build brands, with potential acquisitions in nutrients and grow media, Toler said.

Unlike many cannabis companies, which have gone public in Canada or through maneuvers such as reverse takeovers, Hydrofarm’s offering looked like a mainstream IPO, and it counted JPMorgan Chase & Co. and Stifel Financial Corp. as leading book-running managers.

Federal Prohibition

While institutional investors have shied away from cannabis due to ambiguous rules and federal prohibitions on loans and banking, ancillary plays have caught their attention. For instance, large firms hold more than half the shares of hydroponics retailerGrowGeneration Corp., according to Bloomberg data, while institutional investors account for less than 1% of Curaleaf Holdings Inc., the biggest multistate operator in the U.S.

GrowGeneration’s stock has soared this year, making it atop cannabis stock of 2020. Scotts Miracle-Gro’s Hawthorne business has alsoboomed with a similar, competing business in hydroponics.

With the cannabis industry maturing rapidly, Toler said there’s potential for his company to serve customers from small, craft growers to massive greenhouses. “It’s like the beer business,” he said. “You have Miller and Anheuser-Busch at the top, but you also have 1,000s of craft beers. We think you’re going to have that kind of a structure here.”

Source: Read Full Article