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Canada Bread feeds Latin American firms’ appetite for growth

The biggest bakery you've never heard of is now the biggest bakery in Canada.

Grupo Bimbo S.A.B. de C.V. of Mexico is entering Canada's baked-goods market on top, reaching a $1.8-million deal Wednesday to buy Canada Bread Co. Ltd. Bimbo will instantly acquire 43 per cent of the Canadian bread market, the largest single market share in the country.

But this is no leap for Bimbo. In recent years, the Latin American food giant has aggressively expanded to become the world's largest bread maker. Thanks to its purchases of George Weston Ltd.'s U.S. operations in 2009 and Sara Lee Corp.'s North American bakery division in 2011, it's the biggest baked-goods company in the United States, too.

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We're used to the notion of big consumer-goods multinationals entrenching themselves in emerging markets to capture new sales and capitalize on a rapidly expanding consumer class. But the Bimbo/Canada Bread deal is just the latest example of investment flows going the other way – specifically, Latin American food and beverage makers taking over prominent developed-world brands.

Last year, Brazilian private-equity firm 3G Capital partnered with Berkshire Hathaway Inc. to snap up U.S. household name H.J. Heinz Co. for $23-billion (U.S.), the biggest acquisition in food industry history. Brazil's AmBev, through its 2004 merger with Interbrew and the subsequent 2008 acquisition of Anheuser-Busch, has become Anheuser-Busch InBev SA, the world's largest brewer. (3G also bought U.S. fast-food chain Burger King in 2010.)

In a recent industry report, global consulting firm McKinsey & Co. made note of "emerging-market companies' budding success on the global stage." It said that in the fastest-growing consumer-goods categories in major emerging economies, eight of the top 50 companies are headquartered in emerging markets.

"Companies like Mexico's Grupo Bimbo are venturing outside their home market and skillfully leveraging their emerging-market know-how, favourable cost positions and proximity to a rapidly expanding customer base," the report said.

A Harvard Business Review article on Bimbo noted that the company's background in emerging markets, where they have traditionally depended on small "mom and pop" store operators in remote locations not always well-served by transportation routes, has made the company highly disciplined on cost controls, optimal factory utilization and efficient delivery systems. These traits have served it well wherever it has expanded.

In Canada Bread, it is acquiring a company that isn't in need of a major overhaul. It has a dominant position in its domestic market (in addition to exposure to the U.K., another market that's virgin territory for Bimbo) and it generates consistent, strong cash flow. Its EBITDA margin of nearly 12 per cent is considerably higher than Bimbo's own 9.5 per cent. Maple Leaf Foods Inc., which owns 90 per cent of Canada Bread, isn't selling off a basket case here – it chose to put the bread operation on the auction block last year because it is trying to restructure its operations to reduce its debt and focus on its core meat business.

But it's telling that one of Maple Leaf's first calls when looking for a buyer for Canada Bread was to Bimbo. Increasingly, it seems, the big money for food and beverage takeovers lie in the likes of Mexico and Brazil – due not only to the fast-growing companies from those countries, but also to the major role the industry plays in the financial markets in those countries.

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The food and beverage industry makes up a whopping 17 per cent of Mexico's Bolsa stock index. In Brazil, the industry represents nearly 10 per cent of the Bovespa. Compare this with Canada's Toronto Stock Exchange, where food and beverage companies account for a puny 0.5 per cent of the S&P/TSX composite.

Much like the mining sector in Canada, this market prominence for food and beverage companies generates access to capital to fuel growth, and a strong following among investors that will support and reward them for it. (Note that Bimbo's stock price nearly doubled from mid-2011 to the middle of last year, and despite a pullback in recent months, it still trades at more than 25 per cent of forecast 2014 earnings.)

In Canada, there is essentially no sector play for investors in food and beverage. But Mexico and Brazil offer a deep and substantial food-and-beverage play, which attracts funds from investors seeking exposure to the sector. It's no wonder these markets are becoming hubs of expertise in food and beverage on an increasingly global scale, both on the financing and the operations sides. And, on the other side of the coin, it may be a factor in why Canadian food makers such as Canada Bread's majority owner, Maple Leaf Foods Inc., are retrenching rather than expanding – and are looking well beyond their borders for willing buyers to pay fair value for their assets.

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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