Maple Leaf Foods (TSX: MFI) is one of Canada’s largest food manufacturing companies. With such brands as Maple Leaf, Schneiders, Dempster’s Bread, Olivieri fresh pastas, and Mitchell’s Gourmet, chances are the company’s products have ended up on your dinner table at some point.
Maple Leaf has been on an asset trimming binge lately. It recently announced of the sale of its 90%-owned subsidiary Canada Bread (TSX:CBY) to Mexican company Groupo Bimbo, for $1.8 billion. The Canadian Competition Bureau has approved the deal, now both companies are just waiting for Industry Canada and American authorities to sign off before the deal becomes official. Both approvals are expected in the next three months.
It closed the sale of the Olivieri fresh pasta division to Spain’s Elbo Foods for $120 million, and also sold its rendering and biodiesel business to Texas-based Darling (NYSE: DAR) for net proceeds of $625 million. The company has recently announced the majority of these proceeds — $700 million — will be used to pay down debt.
Many analysts are perplexed at Maple Leaf’s decision to sell Canada Bread, since the company’s meat division is the one underperforming. Ever since the company was implicated in the listeria scandal of 2008, heavy investments have been made to improve meat plants and modernize equipment, all coming at a cost to the bottom line.
The bakery division made Maple Leaf $113 million in 2013, while the meat division lost $124 million, although that loss was mainly because the company opened five new meat plants. Canada Bread is consistently profitable, and could almost be considered a cash cow. Long-term investments have been made in the meat business, but it continues to be weak.
Both divisions are struggling with growth, as both saw revenue declines of about 1% last year. Consumers are starting to get concerned with all the carbohydrates and gluten in bread, and bread is starting to lose its luster as one of those essential items in the kitchen. The meat division struggled with lower volumes in fresh pork and packaged meats, but partially made up those losses with price increases in pork, poultry, and packaged meats. Meat revenue did stabilize somewhat in 2013 after seeing a 4% decline in 2012.
Once the $700 million is applied to debt, the balance sheet will look pretty solid. This will cut total indebtedness to just over $200 million, which will easily be paid off once the Canada Bread deal closes. Going forward, this will save the company $40 million per year just in interest costs. The company will also be sitting on more than $1 billion worth of cash, no debt, and meat plants which have been recently upgraded. With no obvious use of the cash in the short term, Maple Leaf investors can probably look forward to a special dividend, huge share buyback, or big acquisition, depending on what’s available.
Look for the company to increase its quarterly dividend too, which currently sits at less than a 1% yield. Maple Leaf has a long-term goal of 10% EBITDA margins for the meat division, which had sales of $742 million in 2013. A consistently profitable meat division will make enough to cover an increased dividend.
Foolish bottom line
Maple Leaf is in a period of transition, moving from a fully diversified food manufacturer to just a meat producer. They’ll soon be flush with cash from selling Canada Bread, and figuring out what to do with the money will shape the company’s future. Anybody buying Maple Leaf at this point is hopeful of the cash being put to good use. I’d rather see what it decides to do with it before I buy in.
