A potential power struggle at Maple Leaf Foods could alter the company’s role in Canada’s meat industry.
Earlier in August, the Ontario Teachers’ Pension Plan sold a large chunk of its 36 percent stake in Maple Leaf for $113 million.
The buyer, a hedge fund called West Face Capital, now owns 10 percent of Maple Leaf’s common shares.
When it announced the sale of its shares, Teachers said it would consider all options regarding its remaining 25 percent stake in Maple Leaf.
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“While we have been a long-term and supportive investor of Maple Leaf, this sale opportunity was in the best interests of the fund and our members, on whose behalf we invest,” said Neil Petroff, executive vice-president of investments for the pension fund.
Analysts in Canada’s financial media believe Teachers dumped the shares because the pension fund was frustrated by the sluggish performance of Maple Leaf stock.
Since early 2005, when Maple Leaf’s share price hit $18, its stock has trended downward and has been stuck in a range between $8 and $12 for the last 18 months.
Boyd Erman, a reporter and analyst withThe Globe and Mail,speculated that West Face Capital might not tolerate the lackluster performance of Maple Leaf’s meat division.
“Maple Leaf has a good bakery operation that most people agree is well run. The meat business is much more contentious,” Erman said, in a podcast on the paper’s website.
“Other shareholders in this, West Face may as well, may say there’s no money to be made here. It (meat) is a commodity business.”
A tussle over Maple Leaf’s strategy is possible, because the McCain family controls only one-third of the company. West Face and the Ontario Teachers’ Pension Plan have slightly less than one-third of the voting shares. Other shareholders control the remainder.
In an April 29 conference call with industry analysts, Maple Leaf CEO
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Michael McCain said the company’s meat products group was making progress and becoming more profitable, after a listeriosis outbreak in 2008 damaged the company’s brand.
Robert Gibson, a financial analyst who follows Maple Leaf Foods, said the meat division is becoming more efficient and the significance of the West Face deal has been exaggerated.
“The media is focusing on that but it’s a non event,” said Gibson, who works for Octagon Capital.
“Over the last five to six years, the company hasn’t done well. But a lot of that is (due to) the strength of the Canadian dollar.”
Further, Maple Leaf has taken steps to strengthen its meat division, Gibson said, such as consolidating pork processing in Brandon.
Kevin Grier, a meat and livestock analyst with the George Morris Centre in Guelph, said the struggles at Maple Leaf’s meat division are old news.
“Maple Leaf’s meat division has underperformed relative to its bread division for a long time,” he said, noting the company unveiled a strategy in 2006 to improve its meat division by reducing its commodity pork production and focusing on value added meat and meals.
Maple Leaf led off the consolidation in 2007, closing its Mitchell Gourmet Foods slaughter plant in Saskatoon. In May, Maple Leaf announced it would sell its hog slaughter plant in Burlington, Ont., and said in July it had interest “from a variety of parties.”
“The 2006 strategy made good sense,” Grier said, adding it took time to implement a double shift at the Brandon plant but it was worth the effort.
“Brandon is the only (hog) plant in Canada now that is operating in an efficient world scale manner.”
In addition, Maple Leaf is consolidating its bread production. In June, it broke ground for a $100 million bakery in Hamilton, Ont. Once built, Canada Bread will be the largest bakery in the country and possibly the biggest in North America.
However, Maple Leaf’s value added meat business isn’t as concentrated.
The company website says it operates 21 plants, mostly in Ontario, which produce deli meats, hot dogs, processed turkey and bacon.
During a Maple Leaf teleconference, Jim Durran, an analyst with National Bank Financial, asked McCain if the company plans to build one large-scale plant for packaged meats.
McCain noted the Canada Bread investment was a sign of things to come.
“The most significant project announced in the quarter was the new bakery plant to be built in Hamilton…. You should expect many more projects of this size and impact in the remainder of our supply chain over the course of the next several years.”
