Canada Bread Passes the Squeeze Test

Grupo Bimbo offers $1.8 billion for Maple Leaf’s baking division.

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After months of rumors and speculation, Maple Leaf Foods (TSX:MFI) announced on February 12 that it would be selling its 90% stake in Canada Bread (TSX:CBY) to Mexican-based Grupo Bimbo S.A.B. de C.V.

While Canada Bread may not be a household name to most Canadians, its product lines are. They include Dempster’s, Sunshine, Olafson’s, POM, Ben’s, Villaggio, and Bon Matin. Through these fresh and frozen product lines, Canada Bread currently enjoys a 43% market share.

The total amount of the sale is $1.8 billion; Maple Leaf Foods’ portion will be $1.65 billion. The $72 per share offer is well over the $67.26 closing price on the day of the announcement. Since the initial announcement back in October, the stock has climbed 31%. Quarterly dividends of $0.75 will continue to be paid out until the closing of the sale.

Maple Leaf Foods says that the sale “will allow it to pay off debt and focus on completing the five-year restructuring of its remaining processed meats business.”

The new owner

The soon-to-be-owner of Canada Bread was apparently Maple Leaf Foods’ first call when it began looking for a buyer. Grupo Bimbo is a food juggernaut comprised of 126,000 employees working in 144 plants worldwide. This is not the first major acquisition for the company in recent years — it purchased Sara Lee in 2011 and George Weston’s U.S. operations in 2009.

This has made it the largest baked goods company in the U.S. and now it will have 43% of Canada’s market share and a foothold in the UK.

The future for Maple Leaf Foods

This corporate unloading comes months after the sale of Olivieri Foods to Ebro Foods, and the sale of Rothsay (rendering and biodeisel) to Darling International. Maple Leaf Foods has been aggressively trying to refocus the company solely on meat products. This is part of the company’s five-year, $575 million restructuring process, along with streamlining of its distribution systems and openings and closings of plants.

Another issue affecting the company is its massive debt, currently sitting around $1.3 billion. This may have been a factor in the recent series of selloffs.

Foolish bottom line

Maple Leaf Foods has done an excellent job puffing up Canada Bread to be an attractive buy for potential buyers, offering a low-risk, turn-key operation with a massive market share. Investors who jumped on board back in October will see at least a 30% return on their investments; those late to the game could still be able to see some small quick gains as the deal nears completion.

For Maple Leaf Foods, the story is far from over. While these sales could erase its debt, the question of whether it can succeed solely on meat distribution remains to be seen.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Cameron Conway does not own any shares in the companies mentioned.

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