Canadian food giant Maple Leaf Foods Inc. is facing a potential breakup as it puts its $1.6-billion bakery unit up for sale, at the same time as potential suitors target its meat division.
A number of food producers from China, Brazil and the U.S. have expressed interest in recent months in acquiring the meat business, according to sources familiar with the situation. But Maple Leaf's senior executives have rejected overtures for the meat unit, which owns such brands as Schneiders and Shopsy's, because they believe the company would remain undervalued until it finishes a five-year overhaul of its aging factories.
The decision to auction off its 90 per cent stake in its most profitable division, Canada Bread Co. Ltd., is designed to boost shareholder returns at a company whose stock price has languished for years. It would also remake one of Canada's largest consumer products companies, which has been forced to invest heavily in new factories and distribution centres to cut operating costs and remain competitive with foreign players. Maple Leaf's shares rose 10 per cent on the announcement.
The money from a sale of Canada Bread would help Maple Leaf cut debt and complete a restructuring of its core meat division, a $575-million project that is expected to finish in 2015. To restore that business to profitability, Maple Leaf has been trimming product lines, closing old plants and opening new ones.
Maple Leaf, Canada's largest food processor, is an amalgamation of brands that date back to the first half of the 20th century, with its current incarnation formed from the 1991 merger of Maple Leaf Mills Limited and Canada Packers Inc. The company's products including Dempster's bread and Olivieri pasta and sauces are staples in grocery stores nationwide.
The company, which lost $9.8-million in the second quarter, is facing stiff competition from more efficient global competitors.
The company's chief executive officer, Michael McCain, who owns 33 per cent of Maple Leaf, has committed to boosting the meat division's lacklustre profit record when it finishes building a new meat-processing factory in Hamilton and upgrading several others. Eight facilities are in the process of being shut down, eliminating more than a thousand jobs.
Canada Bread earned $73-million in the 12 months ended June 30, and some Bay Street sources say they expect that unit to attract a number of private-equity buyers because of its dominant market share in Canada and steady cash-flow record.
Mr. McCain said in an interview that the meat division is not for sale and did not address questions about interested buyers.
"We're in the process of looking for alternatives for our bakery business. That is absolutely not the case in our protein [meat] business," he said.
Sources say any sale of the meat business is at least 18 months away, and could happen only after the restructuring is complete.
The decision to consider selling the bread division, which operates in Canada, the U.S. and the U.K., follows a review that began nine months ago. Mr. McCain said the company has two choices with Canada Bread: sell it, or implement a plan to boost the company's sales and revamp its products. He would not elaborate on the plan.
Robert Gibson, an analyst at Octagon Capital Corp. in Toronto, said the announcement was a "big surprise."
"They said they'd never do it," said Mr. Gibson, who added it was "ridiculous" to expect the meat division to be sold. He called it Mr. McCain's "baby" and said it is too soon to look for results from the company's turnaround plan.
Maple Leaf, whose shares rose by 10 per cent on Monday, has a market value of about $2-billion on the Toronto Stock Exchange. The market capitalization of Canada Bread is about $1.7-billion, after shares rose by about 10 per cent on Monday, not far from the value of its parent.
Mr. Gibson, the analyst, said investors apply a discount to Maple Leaf shares because of its long-term liabilities of $1.7-billion, including $1.2-billion in debt.
Maple Leaf's debt is 4.1 times its earning before interest depreciation and amortization, far higher than the industry average of 1.9 times. Larger U.S. rivals Smithfield Foods Inc. and Tyson Foods Inc. have debt-to-EBITDA ratios of 2.8 and 0.9, respectively.
In August, Maple Leaf sold its agribusiness division, Rothsay, which renders animals parts. The company said it would use the $645-million raised in that sale to pay down debt.
The sale comes three years after Toronto activist investor Greg Boland acquired a minority stake in Maple Leaf Foods and successfully pushed for a revamped board of directors. In the boardroom Mr. Boland pushed the company to scale back a planned modernization of its meat facilities and instead to focus on fewer upgraded facilities while shuttering unprofitable operations. Mr. Boland's West Face Capital Inc. owns 11.35 per cent of Maple Leaf.
"Greg Boland has been an outstanding director," Mr. McCain said. "This initiative is not about him, any more than it's about me or any other individual. This about doing what's right for the Maple Leaf Foods organization and all of its shareholders and stakeholders."
In 2010, Mr. McCain dismissed the idea of selling the bread business, noting it was closely tied to the meat division and offered the chance to share costs and distribution.