Teachers puts 35% stake in Maple Leaf on the block

Maple Leaf is not one of those stocks that portfolio managers are clamouring to hold, so Teachers would have trouble exiting by simply selling the position.

The Globe and Mail
June 7, 2010

Teachers puts 35% stake in Maple Leaf on the block
Move comes amid shift by pension fund away from owning Canadian stocks
Tara Perkins and Andrew Willis


The production area at a Maple Leaf Foods plant. Here, a worker prepares large rolls of bologna for automated slicing.

The Ontario Teachers’ Pension Plan is shopping its stake in Maple Leaf Foods (MFI-T9.300.030.32%) a major step toward ending the partnership with the McCain family that has controlled one of Canada’s biggest consumer products companies for the past 15 years.

The pension giant has approached prospective buyers for its 35.3-per-cent interest in the food-processing company, according to sources familiar with the matter. That stake, which is worth about $450-million, represents one of Teachers’ largest public-company investments and was its largest single holding of a listed company in Canada as of Dec. 31.

Teachers and the McCains have owned a controlling stake in Maple Leaf since 1995, when the pension fund backed the family’s takeover bid for the food company. A spokesman for McCain Capital Corp., which also holds more than one-third of Maple Leaf, said that it has no plans to acquire Teachers’ stake. Spokespeople for Teachers and Maple Leaf declined to comment.

The move comes amid a shift by the $96-billion pension fund away from owning Canadian stocks in favour of foreign equities, real estate, and inflation-protected bonds. Canadian equities, once a major part of Teachers’ assets, now represent just 9 per cent of its investment portfolio.

Investors holding Maple Leaf shares for the past 15 years have made compound annual returns of just 3.5 per cent, including reinvested dividends, and the shares have fallen by nearly half since April, 2005.

Hit hard by a rising loonie and volatile commodity prices, the company has been restructuring its protein business since 2006 to shift away from commoditized products – such as fresh pork – that are subject to wide price fluctuations. Instead, the company is trying to focus on value-added meat products, meals, and its bakery business; it owns about 90 per cent of Canada Bread Co. Ltd.

The company announced in May that it has launched a formal sale process for its Ontario pork-processing business in Burlington, Ont., “following renewed interest from potential purchasers and improved economic conditions and credit markets.” It has been trying to unload the 365,000-square-foot plant for some time.


A man works to sterilize meat processing and packaging equipment at the Maple Leaf Foods plant in Toronto on Aug. 21, 2008. Mike Blinch/Reuters

In the midst of its restructuring, a crisis erupted. An outbreak of deadly listeriosis bacteria in 2008 that killed 22 people was linked to a Maple Leaf plant in Toronto, overtaking other issues the company faced.

Maple Leaf chairman Wallace McCain told The Globe and Mail last year that the company’s story has been a dramatic one since mid-2008.

“My son Michael [Maple Leaf’s president and CEO] had a plan to make this company competitive, even with a high Canadian dollar,” the senior McCain said. “We had made 25 to 30 acquisitions over the years, and the plan was to simplify our organizational structure. It meant closing small factories, merging companies, installing a new computer system. We were eight months into the plan when a lot of other things blew up.

“Besides the dollar, wheat went up, corn went up, and oil went up. All this had happened and then the listeria crisis struck. The combination hit Maple Leaf Foods right between the eyes. Fortunately we had a good financial base to take us through the chaos.”

Now the clock is ticking on a long-standing shareholder agreement between Teachers and McCain Capital. Teachers notified McCain last summer that it was going to terminate the agreement effective June 30, 2010.

The deal gave McCain Capital the right to three nominees on Maple Leaf’s board and Teachers received two. It also said that Maple Leaf’s CEO would sit on its board, and that Teachers and McCain would mutually agree on seven other directors.

Teachers boosted its holdings of Maple Leaf in late 2008 and two of its executives joined the board in February, 2009.

Claude Lamoureux, who retired as the CEO of Teachers in 2007, has been on Maple Leaf’s board since 2008.

Teachers is not expected to sell its stake in Maple Leaf Foods directly into the public market because the stock is thinly traded, and the pension fund would need to swallow a substantial discount to the current share price in order to sell its entire holding in one go.

“Maple Leaf is not one of those stocks that portfolio managers are clamouring to hold, so Teachers would have trouble exiting by simply selling the position,” said one investment banker who works with the food company. “And the moment Teachers sells a portion of its stake, Maple Leaf will be overhung on expectations the rest of the stake is coming.”

Teachers said last year the shareholder agreement, which has been in place since at least 2001, was no longer needed because McCain Capital and it had always had open and continuing communications about Maple Leaf Foods and it expected that to continue.

It added that as a matter of policy it does not discuss its plans to buy, sell or hold its investments.


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