Maple Leaf Foods Inc. (TSX: MFI) agreed on Tuesday to purchase Lightlife Foods Inc. from Brynwood Partners VI L.P. for US$140 million in cash, along with related transaction costs. This deal is expected to grow Maple Leaf’s portfolio of products, broadening the company’s product range from more traditional protein products to plant-based proteins and alternative proteins — a segment that has continued to grow at a rapid pace.
Solid strategic play
Maple Leaf is operating in a mature market with relatively low margins and high turnover rates. What separates Maple Leaf from the rest of the pack is its operational overhaul which began nearly a decade ago and has cost the company over $1 billion; the overhaul has also resulted in the closing of nine older plants, the construction of new plants, and the sale of non-core assets such as the Canada Bread bakery and Olivieri pasta.
This decade-long strategic turnaround has begun to pay dividends for investors (both figuratively and literally). What has resulted from the company’s massive investments and divestitures is a large pool of capital with unused credit facilities and a number of interesting strategic opportunities to explore in the years to come.
Massive cash hoard a strategic weapon
Maple Leaf is sitting on a large cash hoard, which makes small bolt-on acquisitions such as Lightlife potentially very lucrative. As of September 30, 2016, the company had $445 million of cash sitting on its balance sheet in the form of marketable securities, meaning the company was earning a modest return on its cash.
Maple Leaf has a unique ability to use cash to finance acquisitions such as the Lighlife deal outright; as long as Lightlife can provide a return greater than the A-rated investments Maple Leaf is holding on its balance sheet, its enterprise value should increase accordingly.
The company also has unused credit facilities amounting to $630 million, of which only $70 million is used — down from $137 million in 2015. Whether or not the company decides to use its $560 million of available credit in the future to finance deals, it is clear that unless a very large opportunity presents itself, Maple Leaf will be extremely unlikely to issue new shares or dilute shareholders to finance additional acquisitions.
If Maple Leaf can integrate these acquisitions quickly and efficiently, and bolster earnings per share immediately, the potential upside both in the short and long term can be quite attractive for shareholders.
I tend to agree with the four most recent analysts’ reports on MFI from Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, and Canadian Imperial Bank of Commerce, which have the target price for Maple Leaf between $34 per share and $37 per share, representing a 14-24% upside over the company’s current stock price.
RBC and CIBC both upgraded their target prices when their analyst reports were released. These target price estimates do not include the most recent acquisition, which I believe will add additional value to Maple Leaf’s enterprise value.
Stay Foolish, my friends.
