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What caused the rift at Maple Leaf Foods?

Michael McCain, president of Maple Leaf Foods

Ryan Remiorz/Ryan Remiorz/The Canadian Press

The McCain family and the Ontario Teachers Pension Plan, the two major shareholders in Maple Leaf Foods Inc., had a longstanding agreement that backed the McCains' control of the company. But on Tuesday, Teachers disclosed that it divested nearly one third of its 36 per cent stake in Maple Leaf to Toronto investment firm West Face Capital Inc. and said it was open to selling the remainder. With the agreement expired and West Face now holding 10 per cent, a shakeup may be under way at the Canadian food company.

Why do the events of the last few days signal such an important change at Maple Leaf?

For the last 15 years Maple Leaf Foods has been, in some ways, a private company. The McCain family -- most people would recognize the name from McCain frozen french fries -- a branch of that family has controlled the company for the past 15 years with the help of Ontario Teachers Pension Plan, the huge investor based in Toronto. They, together, invested back in 1995 to buy the company. And while a few shares were in other hands, the majority of the shares were in their hands and they dictated together how the company would be run. For most of those 15 years the company has had lacklustre, below-market performance, especially in terms of its share price but also on some key financial measures, like margins, it's trailed competitors. So what's happened in the past six to eight months, but which we're really beginning to get a view into in the last few weeks, is a dissolution of the partnership between Ontario Teachers and the McCain family that has thrown open the door at Maple Leaf Foods to, potentially, a change of control where the McCain family would lose the controlling influence that it's had over the company.

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How did the McCain family begin to lose its grip on Maple Leaf?

The story goes back a couple of years as the relationship between Maple Leaf and the McCain family and the Ontario Teachers Pension Plan grew strained because of strategic differences and because of the performance of the company. Teachers is there to make money so they can pay the pension payments of teachers. It needs stocks to go up to do that and Maple Leaf's stock was not going up. The company, led by Michael McCain was very focused on investing, spending a lot of money trying to become more efficient. And eventually, it seams, Teachers grew tired of that strategy, thinking that the money could be better spent elsewhere or that it was being poorly spent. So what happened was, this agreement that the McCain family had with Ontario Teachers to work together came up for renewal and Ontario Teachers decided not to renew it on June 30. So that meant that the explicit backing of the family's biggest ally was gone. What's more, Ontario Teachers had been shopping its whole stake, which was about 36 per cent of the company, trying to find a buyer. They couldn't for the whole stake. Probably, frankly, because the company had been such a poor performer. So they had to find somebody who could take some of it off their hands. And we found out on Tuesday that they had sold 10 per cent of the company to a company called West Face Capital. West Face is well known on Bay Street as an investor that goes into companies with a view, to finding underperforming companies that can be shaken up. And Maple Leaf fits the bill perfectly. So now you have a situation where the McCain family has about 30 per cent of the company, which is a big stake, but it's not enough to control it without the help of Teachers. And you've got another shareholder with 10 per cent intent on some pretty significant changes so you set up this face-off.

What is West Face likely to want to change?

There's a couple things that I think West Face is going to key on. One, there is a view that Maple Leaf was run, because it was protected, management was protected by the share structure, that Maple Leaf was run in a manner that isn't low cost, that they spend too much on various projects and the costs could be cut quite significantly. Another area that's likely to be a serious area of contention is the strategy around one of the key businesses at Maple Leaf, which is producing meat. Maple Leaf has a good bakery operation that most people agree is well-run. The meat business is much more contentious. Michael McCain has been leading an investment program to try to plough money into that to make more money. Other shareholders look at this, and I think West Face may as well, and say there is no money to be made here, its a commodity business. You should probably just stop ploughing all this money into it and do something else with the cash. So that is likely to be the biggest flashpoint. We know that the company is already meeting with West Face to discuss what could be done. But its tough to see how these two viewpoints can be easily reconciled because they're very diametrically opposite.

And what will all this mean for investors?

Well we've already seen shares of Maple Leaf, since the announcement of the West Face deal, rise 7 per cent, which for a stock like Maple Leaf, which has been going down more than its been going up, is quite significant. But the biggest thing for investors now is, if you own a share of Maple Leaf, you actually have a chance to control where the company is going. Before this, you were going to be outvoted no matter what by the McCain family and Ontario Teachers. Now, depending on who you like, you can potentially support the side you like and have a significant say in the outcome of what happens at Maple Leaf. It may still be that the folks at West Face capital and at Maple Leaf agree on a plan and it never comes to a battle, but it could also lead to an out-and-out battle where they're seeking shareholder votes to ratify their strategies. And for investors in Maple Leaf that is a big change.

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