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Saputo’s Morningstar deal: the debt is cheap and easy

Saputo president and CEO Lino Saputo Jr., right, and his father Lino, chairman of the board, get set for the the company's annual meeting in Laval, Que., on Tuesday, July 31, 2012.


When striking a takeover, acquirers grapple with a tough question: how do we pay for it?

Do we issue shares? Raise debt? Dip into our cash account?

For Saputo Inc.'s $1.45-billion takeover of Morningstar Foods LLC, the answer was obvious: debt. Prior to the deal, Saputo net debt was just 0.4 times earnings before interest, taxes, depreciation and amortization. (The company's long-term debt was $379-million last quarter.)

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Plus, the company bought Morningstar for a low earnings multiple, 7.9 times the target's EBITDA, making accretion easily attainable. BMO Nesbitt Burns analyst Peter Sklar noted on Friday that debt is historically cheap right now, so it makes sense for Saputo to tack some on when it can achieve levered earnings so easily.

The new debt comes in the form of a fully committed bank loan.

Saputo went up against Michael Foods Group in the final round of the auction to sell Morningstar, according to Reuters. Having won, Saputo will acquire a business that has different strengths than its current U.S. business. Saputo is focused on cheese making and its whey by-products south of the border, while Morningstar produces things like creams and soft dairy products such as sour cream and cottage cheese.

The acquisition comes after Saputo launched a big secondary share offering this summer, which saw Jolina Capital, a holding company owned by chairman Lino Saputo Sr., unload $130-million worth of shares, bringing its ownership down to 34 per cent.

The bought deal came after Saputo's shares had climbed about 10 per cent since the start of the year. Following the offering, the stock lost its 2012 gains, but has since climbed back and is now up about 21 per cent for the year.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More


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