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Streetwise Betting on breakfast sandwiches: CPP invests $200-million in Canada’s Premium Brands, shares pop

Starbucks breakfast sandwiches are supplied by Premium Brands.

TED S. WARREN/AP

Canada Pension Plan’s investment arm is spending $200-million to acquire a 7.1-per-cent stake in Premium Brands Holdings Corp., forming a relationship with the Canadian company that supplies Starbucks Corp. with its popular breakfast sandwiches.

Based in Richmond, B.C., Premium Brands has grown from a local purveyor of pork to a North American powerhouse that does business with Starbucks, controls more than 40 brands of meats and seafood and also supplies the Keg and Boston Pizza.

Premium Brands is also on the cusp of a new partnership with Walmart that will help the retailer expand its breakfast offerings. The contract will service a store rollout that is set to begin June 1.

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Given the growth potential, Canada Pension Plan Investment Board (CPPIB) is taking a minority stake in the company, which comes with certain board nomination rights. In doing so, the pension fund is betting on shifting food preferences, with more people buying breakfast sandwiches on the go, and choosing premium-priced meats for their quality.

The investment also comes at an opportunistic time. Premium Brands’ shares started to soar in 2015 when sales of Starbucks’ breakfast sandwiches took off, helping Premium Brands’ stock price more than quadruple over 3.5 years to peak at $121.41. Yet, since mid-2018, the stock has deflated amid operational setbacks and soaring input costs, allowing CPPIB to invest at $76.02 a share.

Despite the pullback, Premium Brands is expected to benefit from winning over a reputable long-term investor as it embarks on a five-year growth plan. The investment also means the company has secured the capital it needs to fund its expansion.

“We view CPPIB’s investment in Premium Brands’ common shares as a vote of confidence that should enable the company to invest in various organic growth initiatives, improve its balance sheet and continue its well-executed M&A program," Desjardins Securities analyst David Newman wrote in a note to clients.

On Tuesday, shares of Premium Brands jumped 8.6 per cent to close at $84.80. CPPIB declined to comment for this story. Premium Brands did not return a request for comment.

Premium Brands intends to use the fresh funds to pay down debt and to finance its growth. The company is known as a serial acquirer that scoops up smaller businesses such as Oberto Sausage Company and Buddy’s Kitchen and folds them into a larger conglomerate. The division that services Starbucks came from acquiring a Seattle-based company, SK Food Group, in 2010.

While its acquisitions have boosted revenues, they have also been funded with debt at times, and Premium Brands’ leverage sat at 4.5 times the company’s adjusted earnings before interest, taxes, depreciation and amortization at the end of fiscal 2018 – rather high by normal standards.

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Cutting some of this debt will allow the company to re-invest future cash flow into growth projects. In a note to clients Tuesday, RBC Dominion Securities analyst Sabahat Khan wrote that Premium Brands will now have "flexibility to pursue organic growth opportunities and acquisitions much sooner than we had anticipated and without having to tap the public markets [for fresh cash].”

Premium Brands recently unveiled targets for its five-year growth trajectory. In 2023, management hopes to bring in $6-billion in revenue – double the amount earned in 2018. And of this growth, between 30 per cent and 40 per cent is projected to come from acquisitions.

As for the expansion from existing businesses, Premium Brands plans to lean on its sandwich division, which accounted for 21 per cent of revenue in fiscal 2018 and is the company’s largest sales contributor. The expectation is that the company will target retail grocery chains such as Costco and convenience store networks owned by 7-Eleven and Alimentation Couche-Tard.

Sales to Starbucks, meanwhile, currently make up 14 per cent of Premium Brands’ revenue, down from around 20 per cent in previous years, according to Desjardins.

Premium Brands also runs a premium-food distribution business, which largely focuses on seafood. The division is expected to expand by using a new distribution facility in the Greater Toronto Area, which will help to service new partners, and to grow in the United States through the recent acquisition of Ready Seafood Co.

CPPIB is purchasing its stake through its Relationship Investments arm that makes direct minority ownership investments in public or soon-to-be-public companies. As of March 31, the pension fund had $12-billion allocated to this investing strategy, and other holdings include stakes in IHS Markit and Cellnex Telecom.

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