The remarkable bidding war for Hillshire Brands Co., which Tyson Foods Inc. won by paying a 70-per-cent premium for Hillshire's stock, has lifted the shares of most of the companies in the meat and packaged goods sector, including Canada's own Maple Leaf Foods Inc.
But have Maple Leaf shares, up 8 per cent to $18.67 since the sector's takeover frenzy began in May, risen enough to reflect the new landscape? Not at all.
In large part, this seems to reflect the long, still-in-progress turnaround at Maple Leaf, where profits are elusive. If the company finds its footing, however, the current environment suggests it could ultimately find – wait for it – a meaty multiple.
Let's review the Hillshire bidding, which started as the meat industry's giants looked askance at Hillshire's plan to bulk up by purchasing Pinnacle Foods, the maker of a host of well-known non-meat brands, such as Birds Eye vegetables. Tyson and Pilgrim's Pride engaged in a bidding war that valued Hillshire first at $45 (U.S.) a share, then $50, then $55, and finally, the winning $63 bid from Tyson.
That bid approaches 17 times Hillshire's EBITDA, or earnings before interest, taxes, depreciation and amortization for the past 12 months, a multiple CIBC's Mark Petrie calls "stunning." Tyson suggests it can add $300-million to Hillshire's earnings through cost-cutting and other "synergies"; if so, the multiple is a more modest 10.5 times EBITDA.
How does that compare with Maple Leaf? Well, it's speculative, because the ongoing restructuring, in which the company is moving away from old, inefficient production plants, means first-quarter EBITDA was negative.
So, let's look to 2015, as most analysts are doing. The company has a profit-margin target that implies EBITDA of about $300-million (Canadian). A number of analysts have expectations below that, in the $270-million range.
Even with the increase in the last month, Maple Leaf currently trades around 6.5 to 7 times those EBITDA forecasts – anywhere from 30 per cent to more than 50 per cent below the Hillshire multiple, depending on how you measure it.
Michael Van Aelst and Derek Lessard of TD Securities note that Maple Leaf's brands are as strong in Canada as Hillshire's in the much-larger United States. Hillshire is No. 1 in six categories, most relating to hot dogs and sausages. Maple Leaf cuts a wider swath as No. 1 in Canada in sliced meats, bacon, wieners, cooked sausages, canned meats, lunch kits and fresh chicken.
Because Maple Leaf isn't just a collection of brands – it has meat-processing assets, too – it might be seen as a little harder to digest, and therefore less valuable, than other companies. But CIBC's Mr. Petrie says JBS S.A., the majority owner of Pilgrim's Pride, and Japan's Itochu Corp., a 33-per-cent owner of Manitoba pork producer Hylife, wouldn't be scared off by Maple Leaf's production assets.
The TD analysts recently moved their 12-month target price to $23, with additional upside to the mid-$20s if the company actually achieves its 10-per-cent EBITDA margin target. If it receives a takeover bid, they say, the stock should be "closer to $30."
Mr. Petrie says a 10.5 EBITDA multiple "is not inconceivable" if Maple Leaf hits its targets. By my math, that implies a $28 price on Maple Leaf. Mr. Petrie's CIBC colleague Stavro Stathonikos, using a 16.5 multiple that's closer to Hillshire's unadjusted sales price and slightly different numbers for Maple Leaf's earnings and cash on hand, arrived at a $35 value for Maple Leaf in a note to his clients this week.
CEO Michael McCain, a member of the company's founding family, has said the company is not for sale. He's also said, however, that he'll act in the best interests of shareholders. Perhaps a sale needs to wait until Maple Leaf delivers on its earnings goals. But in the current climate, shareholders are likely best served if Maple Leaf is served up to an acquirer.