Maple Leaf vs. West Face Capital

This could be accomplished through the divestiture of Maple Leaf’s 89.8% interest in Canada Bread Company Limited, which contributed to 33% of Maple Leaf’s revenues and 46% of its profits in 2009. Canada Bread is a leading manufacturer of value-added bakery products with a strong presence in Canada, the U.S. and the U.K. With its standing as one of two bakeries with a national presence (the other being George Weston), and with the recent high level of M&A activity in this area (for example George Weston’s $110 million purchase of ACE Bakery), it is likely that Maple Leaf’s stake in Canada Bread could be sold at a premium with a price of $1.8 billion.

http://www.dayonbay.ca
December 9, 2010

Maple Leaf vs. West Face Capital
Simon Cai

A look at the battle in the boardroom and how things could play out.

Just before market closing last Friday, West Face Capital Inc. created a stir in the market by announcing that it would launch a proxy battle against Maple Leaf Foods in an attempt to nominate its own independent directors. While Ontario Teachers’ Pension Plan voiced its own displeasure regarding the company’s disappointing growth and stock price performance with the intention of unloading its entire stake, this recent development has taken the battle to a whole new level by pitting a little-known hedge fund against some of Canada’s best known business leaders who sit on Maple Leaf’s board, including Purdy Crawford and Geoff Beattie. If West Face succeeds in replacing the board of directors, a number of intriguing scenarios could play out, most notably the possible break-up of the company in order to fully realize its true potential.

Founded by Greg Boland, West Face Capital has achieved a considerable amount of success in employing a variety of strategies to obtain above market returns, with a compound annual return of 25% from 1998 to 2006, while managing $400 million in assets. Most of its well-known investments are event-driven, meaning they aim to take advantage of price inefficiencies in the market caused by major corporate events. A good example is West Face’s purchase of convertible debt when Saskatchewan Wheat Pool was in financial distress with its high debt load; their investment was subsequently converted into an equity stake that rose in value after debt restructuring. Another example involves the purchase of an 18% stake for $27.3 million in the steel producer Stelco during its restructuring, an investment which quadrupled in value after the firm emerged from bankruptcy protection.

Even though the main issue at hand appears to be corporate governance, it is probable that the dispute centers on the two parties’ disagreement over Maple Leaf’s new strategic plan. The plan involves a $1.3 billion capital investment between 2010 and 2013 to increase both scale and its range of products, along with the aim of improved margins in its protein and bakery product groups. Three months ago, Ontario Teachers’ Pension Plan had proposed the sale of Rothsay Rending, an animal by-product recycler that is part of Maple Leaf’s agribusiness division. As a highly profitable unit, Teachers made a case for its sell-off as they believed that it would be worth more as a separate entity. After receiving a cool reception to the idea, Teachers decided to sell almost a third of its stake to West Face, and now the hedge fund itself is likely showing its own frustration in its inability to influence the management’s decisions over the “value creation” plan of the firm.

It would be very interesting to see how events would unfold if West Face were to get its way and replace the board of directors with its own preferred candidates. In particular, the possibility of a break-up of Maple Leaf Foods has been raised for the purpose of maximizing West Face’s return on its investment, as the company is likely worth more in pieces than as a whole. This could be accomplished through the divestiture of Maple Leaf’s 89.8% interest in Canada Bread Company Limited, which contributed to 33% of Maple Leaf’s revenues and 46% of its profits in 2009. Canada Bread is a leading manufacturer of value-added bakery products with a strong presence in Canada, the U.S. and the U.K. With its standing as one of two bakeries with a national presence (the other being George Weston), and with the recent high level of M&A activity in this area (for example George Weston’s $110 million purchase of ACE Bakery), it is likely that Maple Leaf’s stake in Canada Bread could be sold at a premium with a price of $1.8 billion.

Jim Durran, an analyst at National Bank Financial, did his own calculations and arrived at a projected share price of $16.38 in a breakup involving the sale of its bakery and protein business, compared to his valuation of $15.38 per share assuming the successful implementation of the management’s new strategic plan. Another way to illustrate the hidden value inside Maple Leaf is through a breakdown of its share price. Maple Leaf’s bakery operation is valued at $1.02 billion based on a market price of $45.05 per share for Canada Bread. With a market capitalization of $1.56 billion for Maple Leaf, this means the Canada Bread subsidiary accounts for 66% of Maple’s market value. In other words, the meat processing and agribusiness unit of Maple Leaf could be bought for only $3.91 per share (34% of overall share price), which could be seen as a bargain considering it contributed 53% of the overall firm’s EBIDTA in 2009.

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With a string of strong returns on past investments such as CanWest Global Communications, Stelco, Saskatchewan Wheat Pool and CP Ships, West Face’s quest for its own say over Maple Leaf’s businesses should not be taken lightly, even if it remains the underdog at this moment. With a reputation for its active hands-on approach, the Maple Leaf Foods we know today could become a very different company if West Face wins this battle.

http://www.dayonbay.ca/component/content/article/46-features/251-maple-leaf-vs-west-face-capital


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