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A prominent U.S. short-seller targeted Canadian dairy giant Saputo Inc., SAP-T sending the company’s shares falling Tuesday.

Spruce Point Capital Management LLC released a 147-page report attacking Saputo Tuesday morning. In it, Spruce Point questioned the success of Saputo’s acquisitions and said it thinks a tough global market for milk consumption means the company will have increasing difficulty covering its dividend.

Spruce Point says it sees 40 per cent to 60 per cent downside in the company’s shares, with a fair value of $13.75 to $20.50 a share.

In an unsigned statement sent to The Globe and Mail Tuesday afternoon, Saputo said Spruce Point never engaged with the company. “Saputo is of the opinion that the report is without merit and that it contains mischaracterizations and incorrect information, which are misleading and solely intended to benefit the author.” The company did not identify what it says is incorrect.

Saputo said it “remains focused on its global strategic plan initiatives and driving sustainable, profitable growth for all its stakeholders.”

The company’s stock (SAP-T) was down as much as 7.8 per cent, to $31.62 a share, on heavy volume in early trading. It recovered by day’s end to close at $32.26, down just under 6 per cent from Monday’s close.

The nine analysts who cover the stock have an average 12-month target price of $38.17, according to Bloomberg. At the current trading price, the stock has a dividend yield of just over 2 per cent.

Short-selling shares is a bet that a company’s stock price will drop. An investor borrows shares, sells them, and repays the loan by returning new shares, hopefully bought at a lower price. Spruce Point chief executive officer Ben Axler would not say how large the firm’s Saputo short position is, citing his company’s policy and U.S. securities laws that restrict investment funds’ public statements.

Spruce Point has targeted a number of Canadian companies over the past decade. It made successful bets against Lightspeed Commerce Inc. and Nuvei Corp. in 2021, marking a turnaround for the investment firm after less successful campaigns against Dollarama Inc., Canadian Tire Ltd. and GFL Environmental Inc. over the preceding three years. It had a big winner in 2018 with a bet against Maxar Technologies Ltd., the former MacDonald Dettwiler & Associates Ltd.

Spruce Point argues Saputo has a high cost structure “in a thin-margin, low-to-no-growth industry.” Consumers worldwide are consuming less milk, and those who do are increasingly buying private-label products, versus the branded dairy Saputo emphasizes.

“Dairy/milk consumption has been declining in Saputo’s key markets,” Spruce Point wrote. “Spruce Point believes there is no end in sight for this annual decline and in fact believes the decline will become larger as innovation around dairy-free alternatives continues to deliver on taste, quality and nutritional value for both adults and kids.”

Spruce Point believes Saputo’s acquisitions aren’t contributing meaningful organic revenue growth, contrary to CEO Lino Saputo’s recent comments on a conference call that out of roughly three dozen companies Saputo has bought since going public, “every single one of those acquisitions with the exception of one or two have driven a benefit for us. Whether it is product diversification, getting into new categories, getting into new regions, into new countries, they all made sense for us.”

Spruce Point says Saputo is not generating enough cash flow to cover its dividend, despite introducing a dividend reinvestment plan, or DRIP, that allows shareholders to receive their payouts in stock. In its past fiscal year, Saputo generated $693-million in cash from operations, then spent $578-million on property, plant and equipment and lease repayments. That left $115-million, while Saputo paid out $209-million in dividends.

“We estimate Saputo is owned approximately 40 per cent by retail investors,” Spruce Point wrote. “We believe the most pressing issue for these investors should be the sustainability of the dividend.”

Spruce Point also says Saputo has stopped disclosing historical revenue for companies it acquired, production and export data in the key countries where it operates, and excess manufacturing capacity by geographic location. “Spruce Point has analyzed many struggling companies over the years, and a consistent theme we find is that challenges are often accompanied by reduced transparency and disclosures.”

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