CoolBrands makes big leagues, but may leave U.S. players cold

Despite the buzz CoolBrands got from the Nestlé-Dreyer's transaction, Mr. McIlveen said many U.S. institutional buyers will simply rule out investing in a company if it doesn't have an independent board. Of the six directors on CoolBrands board, only one is an outsider and the rest are company executives. The fact that the company still does not hold conference calls with analysts and that it ran into controversy over a stock options plan last fall may arise from a lack of board independence, Mr. McIlveen said.

The Globe and Mail
October 1, 2003

CoolBrands makes big leagues, but may leave U.S. players cold
Corporate governance issues could keep institutional buyers away, analysts say
Showwei Chu

CoolBrands International Inc. has entered the big leagues with a recent acquisition, but some analysts say concerns about corporate governance will keep large institutional buyers on the sidelines.

"I see that as an issue," said John McIlveen, an analyst at Toronto-based Salman Partners Inc.

The Markham, Ont.-based company, known for its Eskimo Pie treats and Yogen Fruz franchises, has attracted favourable investor attention since the spring when it landed the deal of a lifetime, snapping up assets as part of Nestlé SA's bid to get approval from U.S. regulators to buy rival Dreyer's Grand Ice Cream Inc.

Despite the buzz CoolBrands got from the Nestlé-Dreyer's transaction, Mr. McIlveen said many U.S. institutional buyers will simply rule out investing in a company if it doesn't have an independent board.

Of the six directors on CoolBrands board, only one is an outsider and the rest are company executives. The fact that the company still does not hold conference calls with analysts and that it ran into controversy over a stock options plan last fall may arise from a lack of board independence, Mr. McIlveen said.

"Clearly, you'd like some more board independence," said Doug Cooper, an analyst at Paradigm Capital Inc.

CoolBrands co-chairman Michael Serruya said in a recent interview that the company will start holding calls beginning in November when it reports fourth-quarter results, and that analysts have made the governance issue "clear to us."

"There will be changes made at the appropriate time … in order for us to build our shareholder base, especially now as we continue to forge further into the United States," Mr. Serruya said. He declined to provide further details or give a time frame.

Investors, such as portfolio manager Greg Eckel of Morgan Meighen & Associates Ltd., have weathered some lows with the company over the governance issues but have faith it won't repeat the same mistakes.

"They've seen what happens in the market," Mr. Eckel said, referring to last year, when CoolBrands shares took a beating after the company proposed to nearly triple the number of stock options, substantially diluting the stock, and the top five executives had cashed out a significant number of options, giving them proceeds on average of $1.55-million each. "The stock gets punished. They don't want that. They're tied in." (After revising the options plan twice, CoolBrands later won approval of the option plan from shareholders.) Mr. Eckel said he does not think an independent board will significantly boost CoolBrands' institutional investor base in the near term, as many Dreyer's shareholders jumped into its stock after it completed the Nestlé-Dreyer's deal in June.

The corporate governance issue doesn't seem to be holding back the company's stock. Even though its share price has had a good run on the market already this year, climbing 197 per cent, investors and analysts believe there's still more growth ahead for CoolBrands.

In addition to getting three ice cream and sorbet brands, CoolBrands now owns a network of delivery trucks and warehouses in 10 U.S. states that it didn't before own, which it can further expand, analysts said.

"There's a real big opportunity to piece together a national distribution network and that'll act as another good source of revenue," said Mr. Cooper, who rates the stock a "buy" with a 12-month price target of $25. Sprott Securities Inc. has a "buy" recommendation with a $21.15 price target, and Canaccord Capital Corp. has a "hold" with its price target under review. (The stock closed at $15.93 on the Toronto Stock Exchange yesterday.) CoolBrands could pick up more distribution assets from small, private companies that lost most of their business when Nestlé bought Dreyer's, Mr. Cooper said. They no longer have Nestlé products to truck to grocery stores and supermarket chains now that Nestlé has access to Dreyer's distribution network, he said.

There are also other potential distribution contracts available from big hitters, such as Masterfoods USA (formerly Mars Inc.) and Unilever NV, which wouldn't want to have their ice creams delivered to stores on Dreyer's trucks now that Dreyer's is a part of rival Nestlé.

CoolBrands could also expand its portfolio of licensed brands by finding new snack foods to turn into ice cream versions, analysts said. The portfolio already includes frozen desserts from Tropicana, Welch's and Weight Watchers.

Last month, CoolBrands struck a licensing agreement with Atkins Nutritionals Inc., the overseer of the popular Atkins diet, to sell eight low-carbohydrate ice creams.

CoolBrands' year-end results will give a better idea of how the company is doing. In mid-September, CoolBrands projected it will post a fourth-quarter share profit of 26 to 28 cents on a fully diluted basis. For the year ended Aug. 31, it expects a share profit of 58 to 60 cents. It did not provide sales estimates.

The estimate from analysts is for a share profit of 56 cents on sales of $352.3-million, according to Multex.

When CoolBrands' latest deals, which also include the acquisition of a 50.1-per-cent stake in an ice cream plant in Dallas, make their full contribution, the company is expected to post a fiscal 2004 share profit of $1.07 on sales of $782-million, Mr. Cooper said.

"They've got all this ahead of them, so the opportunity for them to slip has been heightened, but it all seems to be good," Mr. Eckel said.

Some analysts, including Mr. McIlveen and Mr. Cooper, speculated that the company will be acquired by a bigger competitor once it builds its distribution network and expands its brand portfolio.

Mr. Serruya acknowledged that possibility, given the tendency in recent years of industry players such as Unilever and Nestlé to leapfrog one another by buying most of the familiar brands.

"When someone builds a national business, they look at them," Mr. Serruya said.

CoolBrands International Inc.
Markets a range of frozen novelties and desserts under licensing agreements. Brands include Eskimo Pie, Tropicana, Welch's and Weight Watchers. CoolBrand's franchise outlets are Yogen Fruz and Can't Believe It's Yogurt.
Head Office: Markham, Ont.
Telphone: 1-905-479-8762
Web site: http://www.yogenfruz.com
TSX symbol: COB.A
Ownership: Widely held
Share values
Trailing 12-month earnings per share: 49 cents
52-week intraday high: $18.75
52-week intraday how: $4.25
Last close: $15.93
Change from previous: +80 cents
Market cap: $707-million
1-year total return: 123%
5-year average annual return: 14.3%

Funds with heaviest weighting in CoolBrands
Date as of 2003 Fund/Share holding as a % of total fund value
31/7 Sceptre Equity Growth: 6.1
29/8 Altamira Special Growth: 5.1
31/7 Synergy Canadian Growth Class: 4.7
31/7 Synergy Extreme Canadian Eq: 3.8
29/8 National Bank Small Cap: 3.0
31/7 Scotia Canadian Small Cap: 2.9
SOURCES: BLOOMBERG FINANCIAL SERVICES/THOMSON FINANCIAL DATASTREAM/WWW.GLOBEINVESTOR.COM


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