George Weston Ltd. is buying Bestfoods Baking Co. in a $1.77-billion (U.S.) deal that will make it the most profitable -- and second-largest -- bakery in North America.
The deal, when it closes this summer, will take Weston's breads, buns and cookies into just about every supermarket in North America.
It will add 19 plants and 12,000 staff to the Weston payroll, along with additional pre-tax profit of $190-million on sales of $1.8-billion.
But Weston paid so much for its much-sought-after prize that it may have to sell its Neilson Dairy and Connors Bros. Ltd. fishery divisions in the near future and use the proceeds to pay down the debt it will incur to swing the deal.
Weston president Richard Currie said Weston may also sell a 5-per-cent stake in its Loblaw Cos. Ltd. supermarket division, taking its holding down to 58 per cent.
"We're pretty confident it will go ahead," he said, adding that the decision will be made "shortly."
Weston and its supermarket subsidiary Loblaw will release their fourth-quarter results on Thursday.
Despite the high cost of the deal, Weston executives said they were thrilled to catch Bestfoods, a highly rated bakery that they believe is one of the most successful national and regional brands in the United States.
"This is a very exciting time for the company," said Galen Weston, chairman of the company his grandfather founded 120 years ago in a downtown Toronto back alley. "This dramatically strengthens the company in the United States and opens a new era for growth."
Mr. Currie added that "Bestfoods Baking is an outstanding company. Its brands, earnings performance, management and prospects make it one of the most desirable acquisition candidates in the North American baking industry. The opportunity to add such a unique business to our portfolio does not come along every day."
Bestfoods Baking is best known by its local brand names, Entenmann's, Arnold, Freihofer, Brownberry and Orowheat. The bakeries were acquired by Unilever NV of the Netherlands with its purchase of Bestfoods last June along with a diverse collection of plants that produce corn oil, peanut butter, soups and sauces.
Weston, based in Toronto, is already a major player in the North American food processing industry, with annual sales of $2.6-billion (Canadian) a year of which just more than half comes from the U.S. market.
In that country, Weston trades under such well-known bakery brands as Stroehmann, Interbake and Maplehurst, mainly in the highly populated northeastern states. The Bestfoods acquisition will complement these properties well, Mr. Currie said, because it has 19 bakeries all over the country and a major presence in California and the Pacific northwest, where Weston has few sales.
Mr. Currie said the deal will add to Weston's bottom line immediately. Bestfoods earned about $190-million (U.S.) pre-tax in 2000. It will bring synergies that Weston said would be worth about $15-million in 2001 with an additional $30-million to $40-million next year.
In 1999, Weston made a profit of $351-million (Canadian) or $2.67 a share on sales of $20.9-billion.
The synergies will be valuable because Weston will be able to meld its existing administration, distribution and manufacturing operations with Bestfoods', particularly in the U.S. northeast. In addition, Mr. Currie said he plans to expand the U.S. bakery business, using the Weston and Bestfoods bakeries as the foundation for growth.
"This transaction complements our already successful baking operations in the United States, makes us truly North American in scale and provides a tremendous platform from which to create additional values for consumers and shareholders," Mr. Currie said.
He does not plan to sell any of the operations, he said.
Weston executives were very excited about the deal, but analysts balked at the high price that Weston had to pay to snap Bestfoods up from under the nose of at least two other serious contenders, Sara Lee Corp. and Grupo Bimbo de Mexico.
Weston won the day in the simplest manner, by paying the highest price. "We offered the highest bid on the table," Mr. Currie said. "It was aggressively sought after."
He said Weston paid Unilever 9.3 times Bestfoods pre-tax earnings, slightly above the industry average of 8.7 earnings before interest, taxes, depreciation and amortization (EBITDA). But he said that was a fair price since Bestfoods was "an above-average company."
One analyst described the price as "rich, but not outrageous."
Investors weren't so sure. Weston shares initially fell by more than $2 on the Toronto Stock Exchange following the announcement yesterday morning. The price had moved up by the end of the day, finally closing at $77, down 59 cents.
Dominion Bond Rating Service Ltd. was so concerned about the new debt that Weston will incur to buy Bestfoods that it downgraded its notes and debentures to A (low). Dow Jones said DBRS took this action because the purchase will be entirely debt financed, and that "the substantially higher leverage will materially weaken Weston's credit strength."
However, DBRS confirmed Weston's commercial paper rating at R-1 (low) with a stable trend, and confirmed its rating of Loblaw, which is controlled by Weston.
Mr. Currie would not disclose how much he expects to get from the sale of the Neilson and Connors operations. However, he said those two divisions had pre-tax profit of about $85-million in 2000 and assets of $400-million.
Connors operates large sardine and salmon operations with sales of $560-million a year.
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