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The incredible shrinking ice cream company Add to ...

Mr. Smith went to Washington, so to speak, and, in 2003, made a deal to buy Nestlé's Dreamery ice cream and Whole Fruit sorbet brands, as well as a licence for Godiva ice cream-a small but highly profitable so-called superpremium brand-all for $13.5 million.

The same year, CoolBrands bought a 50.1% stake in Americana Foods LP, which supplied ice cream and frozen yogurt to Wal-Mart and other chains. That acquisition gave CoolBrands another large plant in Dallas, operating at about 40% of capacity.

Together, the two deals catapulted CoolBrands into the No. 3 spot in the North American ice cream market, adding about $250 million (U.S.) in annual revenues to its existing $200 million (U.S). The company still had around 4,000 franchise outlets in dozens of countries, but they now generated only about 10% of total revenues. Even at No. 3, however, CoolBrands was earning only a fraction of the ice cream revenue of Nestlé or Unilever in North America. And that fact didn't capture the disparity in market muscle. When retailers deal with Nestlé, they're supplied not just with ice cream, but with baby formula, candy (Smarties), prepared foods (Stouffer's), pet food (Purina), beverages (Nescafé), bottled water (Perrier), dairy (Carnation) and more besides. Unilever's reach goes beyond the food aisles (Hellmann's, Knorr, Lipton, Slim-Fast, Becel) to personal products (Vaseline, Close Up, Lux, Dove) and household goods (Vim, Sunlight, Snuggle). The two companies' global sales in 2004 were roughly $70 billion (U.S.) and $50 billion (U.S.), respectively.

Despite the long odds of CoolBrands' withstanding the clout of companies that were more than 100 times larger, investors were ecstatic at the company's acquisitions. In just over a month during the summer, CoolBrands' share price soared by more than $5, to $16.50, triple the share price at the beginning of the year.

That fall, however, the cheers on Bay Street faded. Regulatory filings disclosed that Michael and Aaron Serruya, Richard and David Smith, and Stein had cashed in 3.6 million stock options and sold the shares at $15.85 apiece, netting them a total profit of $43.6 million. The group had already taken heat a year earlier when they proposed to triple the pool of options that could be awarded to executives to 9.5 million. They scaled that back to 5.2 million after other large shareholders, such as Sprott Asset Management, objected publicly.

For many critics on the Street, the big payday turned CoolBrands' governance into the company's signal characteristic. The Serruyas, the Smiths and Stein had cashed in one-vote shares, but retained the bulk of the 10-for-1 voting shares that gave them a lock on the board of directors. The board had just six members-none other than the Serruyas, the Smiths and Stein, plus the sole independent director, Toronto developer Romeo DeGasperis.

It was also hard to separate hype from hard facts. Although Michael Serruya and Stein often talked to reporters, CoolBrands didn't hold regular conference calls with Bay Street analysts. "Management, no question, got a little carried away with respect to the promise of their company, and undoubtedly got a little too promotional," recalls Toronto money manager Andrew McCreath, who ran mutual funds that had holdings in CoolBrands.

That September, The Globe and Mail's annual corporate governance rankings judged 207 Canadian public companies in categories such as board independence, executive pay practices and disclosure. CoolBrands finished dead last. In response, Michael Serruya promised to hold calls for analysts.

The controversy died down in early 2004, however, when CoolBrands announced some very impressive profit numbers. In January, the company said that its first-quarter net earnings had almost tripled from the previous year to $7.6 million. Some analysts did quibble about puzzling aspects of the financial statements, such as why profit in the previous fiscal year had been less than the cash the company had thrown off. But most investors paid little attention, and the share price hit a high of $27 on March 1, 2004.

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