Maple Leaf Cheapest as Food Maker Peers Seek Deals

Maple Leaf Foods Inc., the Canadian producer of foods from Black Forest ham to bagels, offers the best value among North American peers as the acquisition of Smithfield Foods Inc. fuels speculation of more deals.

Maple Leaf has surged 16 percent since Shuanghui International Ltd. of Hong Kong announced a C$4.7 billion deal to buy Smithfield Foods Inc. on May 29. The rise still leaves Maple Leaf with a price to earnings ratio of 12.2, the lowest of 22 North American food producers with a market value of $500 million to $4 billion, data compiled by Bloomberg show.

“If you want access to the Canadian market, which isn’t a bad market, the cheapest way of doing it is probably through Maple Leaf Foods,” said Michael Palmer, a Toronto-based analyst at Veritas Investment Research. “They just spent a few hundred million modernizing their plant, which would also make them more competitive.”

Maple Leaf may be attractive to Austin, Minnesota-based Hormel Foods Corp., the maker of Spam lunch meat, because the two companies have similar business models and products, Palmer said in a June 20 interview.

Smithfield, the world’s largest hog producer, itself bid for Maple Leaf before agreeing to the $4.7 billion Shuanghui deal, according to a person familiar with the situation. Smithfield disclosed in a June 18 proxy filing it bid for a large packaged-meat business without naming the target. Thailand’s Charoen Pokphand Foods Pcl and Brazil’s JBS SA both considered buying Smithfield, people familiar with the matter told Bloomberg News last month.

Middle Class

Companies such as Shuanghui are searching for supply and technological expertise to feed growing middle classes in emerging markets. Annual global protein consumption is expected to increase to 52 kilograms (115 pounds) per capita by 2030 from 40 kilograms, according to a report from Bloomberg Industries. China’s food industry has been plagued by scandals from the illegal dumping of hogs in rivers to tainted milk.

“Chinese food companies need to go outside to learn advanced technology and experiences on food safety,” Shuanghui Chairman Wan Long said in an May 31 e-mail in response to questions from Bloomberg regarding the company’s acquisition of U.S.-based Smithfield Foods.

‘The Excitement’

Smithfield Foods declined to comment on whether the company made a bid for Maple Leaf, Keira Lombardo, a spokeswoman for the Smithfield, Virginia-based company, said in a June 24 e-mail. JBS SA also declined to comment, Alexandre Inacio, a spokesman for the company, said in a June 26 e-mail. Rick Williamson, a Hormel spokesman, didn’t return a voicemail yesterday seeking comment while Bangkok-based Charoen didn’t respond yesterday to an e-mail outside regular business hours.

“The excitement near-term is driven by the Chinese bid for Smithfield Foods which highlights the demand in Asia for protein,” Brian Huen, Toronto-based managing partner at Red Sky Capital Management Ltd., said by phone yesterday. “In the longer term though, it’s a transformation and restructuring story and my math suggests if they’re able to get it right, the stock could be materially higher from here. It will take time. It’s a 2015 story.” Huen doesn’t own Maple Leaf shares.

Maple Leaf rose 0.9 percent to C$14.45 at the close in Toronto. The shares have gained 21 percent this year.

Plant Overhaul

The company planned to close eight plants and cut 1,550 jobs by 2014 while modernizing and expanding other Canadian facilities in Winnipeg, Saskatoon and Brampton as part of a five-year overhaul that began in 2010.

Construction is on schedule for “one of the most advanced prepared meats facility in North America,” in Hamilton, Ontario, Maple Leaf said in a June 20 statement. It will also open a new eastern Canada distribution center in 2014, consolidating operations from 19 company-owned and third-party facilities.

Chief Executive Officer Michael McCain, part of the family that owns Florenceville, New Brunswick-based french-fry producer McCain Foods Ltd, has been remaking Maple Leaf after 23 people died and 34 others were poisoned by contamination by listeriosis in 2008 from meat processed at a Toronto plant.

McCain, the biggest shareholder in Maple Leaf with a 33 percent stake according to data compiled by Bloomberg, declined to comment on whether the company may be a takeover target, Dave Bauer, a Maple Leaf spokesman, said in a June 21 phone interview.

Lunch Meats

Greg Boland, CEO of Toronto-based hedge fund West Face Capital Inc., accelerated Maple Leaf’s overhaul after winning a board seat at the company in 2011. West Face now owns 11 percent of Maple Leaf. Boland didn’t return calls for comment on the possibility the company is an acquisition target.

Maple Leaf’s strategy is focused on boosting profitability and cutting expenses to reach a target earnings before interest, taxes, depreciation and amortization margin of 11.7 percent by 2015 from 7.9 percent in 2012, according to the June 20 statement.

The company is expected to increase profits by cutting 800 products while adding others in competitive markets, like gluten-free bakery items and natural lunch meats, Kenneth Zaslow, a New-York-based analyst at BMO Capital Markets, said in June 24 note.

Productivity Gap

Maple Leaf should post a rebound in margins in the second half of 2013, even after challenges like lower export sales to Japan, weak pork and poultry processing margins, and increased exposure to the challenging hog market from its acquisition of Puratone Corp., said Christine Healy, a Toronto-based agricultural analyst at Scotia Capital Inc.

Healy raised her one-year target for Maple Leaf shares to C$15 from C$13.50 amid “increased confidence in Maple Leaf’s ability to close the productivity gap with peers and improve margins.” She currently rates Maple Leaf at sector perform, the equivalent of a hold.

Maple Leaf is expected to generate more than $400 million in cash from operations following its restructuring plan, while its capital expenditure is expected to drop to $200 million from $350 million in 2015, according to Zaslow.

“Despite its well-defined strategy, MFI’s earnings remain pressured by severe challenges,” including higher pork input costs, uncertain volume outlook, limited fresh bread category growth, and uneven and unpredictable transformation startup costs, Zaslow said in a note to clients.

Earnings Leverage

Meat products, which include the company’s Schneiders and Maple Leaf brands, accounted for 62 percent of its revenue last year, the data show. Bakery products, which also include packaged fresh pastas and sauces, represented 33 percent, and sales from Maple Leaf’s rendering, biodiesel and hog production unit made up the remaining 6 percent.

The restructuring plan could make the company more attractive to buyers in a few years’ time, said Derek Dley, a Vancouver-based analyst at Canaccord Genuity Corp.

“On the other side of 2015, we could see substantial earnings leverage coming out of the company,” Dley said. “We may not see those returns this year, but it’s something long term that the company is focused on, that is what makes Maple Leaf more attractive.”

Still, Maple Leaf’s shift in focus to value-added processing from primary manufacturing probably means it isn’t a target at the moment, Dley said. Strong competition in the Canadian market may also deter potential buyers, he said.

Mostly Chicken

There have been 13 deals of North American food companies bigger than $100 million announced this year, with a total value of about $46 billion, according to data compiled by Bloomberg. The average premium was about 29 percent and the biggest deal was the $28 billion acquisition of HJ Heinz Co. by 3G Capital Inc. and Warren Buffett’s Berkshire Hathaway Inc. There were 14 deals valued at about $22 billion in the same period of last year, with an average premium of about 22 percent, the data show.

“There’s JBS, there was always Smithfield, but they’re dealing with the issue of being bought by the Chinese company, there’s always Tyson Foods, they’re mostly just chicken,” said Brian Yarbrough, a St.Louis-based analyst at Edward Jones, on the topic of potential deals.

Gary Mickelson, a spokesman for Tyson Foods Inc., said the company doesn’t comment on potential acquisitions.

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