The capital-strapped income trust that owns 125-year-old Canadian jam and sauce maker E.D. Smith & Sons Ltd. is selling out to a U.S. company for $217-million in cash, and is blaming Ottawa's surprise decision last fall to start taxing trusts for the development.
In the latest in a series of trust sales to foreign and other buyers since federal finance minister Jim Flaherty's Halloween announcement that trusts will be fully taxed starting in 2011, E.D. Smith Income Fund said Monday that TreeHouse Foods Inc. of Westchester, Ill., will buy substantially all of its assets for that price.
TreeHouse, which bills itself as the largest maker of pickles and non-dairy powdered creamers in the United States, also will assume E.D. Smith's existing debt and the costs of the transaction.
The iconic Canadian food processor was incorporated in 1882, but traces its roots to 1878, when its namesake founder, E.D. - for Ernest D'Israeli - Smith, then a bachelor farmer, later a married M.P. and then Senator, began growing strawberries at his property in Ontario's Niagara Peninsula.
The firm's executive vice-president and chief financial officer Bruce Smith is leaving no doubt that the company blames the government's surprise move for it launching a strategic review that has led to today's announcement, although he declined to use the word "blame."
"I would say it's highly unlikely this process would have taken place without the change in the legislation," he said when reached at head office in Winona, Ont. "It created challenges for us to raise capital and was one of the leading reasons we got into this strategic review process."
Close to 20 publicly traded income trusts have been sold or put up for sale since Mr. Flaherty's controversial announcement - mostly to foreigners and private equity firms - although he has rejected suggestions the decision to tax trusts down the road is to blame.
On Friday, the Senate approved Bill-C-52, which includes the trust tax.
E.D. Smith's announcement comes just over six months after the iconic Canadian food maker slashed distributions to unit holders, parted company with then president and chief executive officer Michael Burrows and hired Toronto investment bank Genuity Capital Markets to conduct the strategic review.
Assuming the TreeHouse deal is consummated, unit holders should receive up to $9.15 a unit, less a holdback of 60 cents to cover certain expenses, the fund said in a statement.
This is $1.71 or 23.3 per cent higher than the price of $7.34 at which the units closed on the Toronto Stock Exchange Friday, but is $3.04 below the all-time high of $12.19 they hit in August, 2005.
They bounced up as far as $8.65 on news of the planned sale and were trading at $8.55, up $1.21 or 16.5 per cent shortly after 10.30 a.m. (EDT). TreeHouse shares were down 63 cents (U.S.) at $26.79 on the New York Stock Exchange.
The takeover must be approved by two-thirds of the votes cast at a special meeting the fund will hold for unitholders and is expected to close by the end of August, E.D. Smith said.
TreeHouse, which is more than four times larger than E.D. Smith, has the right to match any competing offer that may emerge and would be paid a termination fee of $8-million if the Canadian firm's board of trustees decides to accept another bid, the fund said.
However, the board is unanimously recommending acceptance of the U.S. firm's offer. "We have conducted an extensive review of the strategic alternatives available . . . and believe this deal provides our unitholders with an attractive price for the business and a material premium to the recent trading level of the units," Jack Scott, the fund's chairman, said in the statement.
Genuity sent copies of the offering memorandum for E.D. Smith to more than 100 potential purchasers, Mr. Smith said, and "six to eight people [took part in]the bidding process."
TreeHouse chairman and CEO Sam Reed called E.D. Smith a "great company" and said the acquisition will open new opportunities in Canada for its business, while the Canadian firm's salad dressings, in particular, will be a "great complement" to TreeHouse's U.S. product lines.
E.D. Smith has production facilities in Winona, Seaforth and Cambridge, Ont., as well as in Pennsylvania. TreeHouse plans to use the Winona head office as its Canadian headquarters.
Mr. Smith said although there is no specific agreement about the fate of E.D. Smith's 800 employees, there is "no indication" that they face layoffs.
E.D. Smith also said in its statement Monday that as the result of an arbitrator's ruling, it has agreed to make a final payment of just over $8-million (Canadian) in connection with the "earn-out" portion of the price of its 2006 takeover of Seaforth Creamery Inc. This brings the final price for the acquisition, the largest in E.D. Smith's history, to $117-million.
The company reported a profit of just $195,000 or 1 cent a unit on revenue of $75.5-million in the first quarter of this year, down sharply from $1.5-million or 11 cents on revenue of $41.3-million in the first three months of last year. It also reported a deficit of just under $17-million, up from nearly $4.2-million a year earlier.
TreeHouse, meanwhile, tallied a profit of $7.4-million (U.S.) or 24 cents a share on revenue of just under $259-million for the first quarter of this year. Profit was virtually unchanged from the first quarter of last year, even though revenue rose $86.2-million.
The company was formed only in 2005. However, it says on its Web site that its key operating unit, Bay Valley Foods, dates back to 1862, when it was launched as Alart and McGuire, "pioneers in the pickle industry." More recently, Bay Valley was the specialty foods division of Dallas dairy company Dean Foods, but was spun off in 2005.