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Buyout firm EdgeStone burned in burger business

EdgeStone Capital Partners' foray into the burger market has ended in insolvency, after a company owned by the private equity firm was forced to seek court protection.

Soaring beef prices left EdgeStone-owned New Food Classics unable to keep operating unless it got court protection, the company said in court filings last month. The company, which manufactured hamburgers and had expanded into other ready-to-eat products, was granted protection and is now well into a court-supervised auction process.

The sale is being expedited because the burger-maker market is at the hottest heading into barbecue season. According to the most recent report from the bankruptcy monitor, 22 potential purchasers signed confidentiality agreements to look over detailed information on New Food Classics.

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The final bid was to be selected on Feb. 17, and the company's main lender had until Tuesday to decide whether it was satisfied with the auction's outcome.

EdgeStone purchased New Food Classics in a 2006 leveraged buyout for an undisclosed sum. It used money from its $360-million Equity Fund II buyout fund, whose investors include Canada Pension Plan Investment Board.

New Food Classics owns plants in Alberta and Saskatchewan, as well as in Ontario. When New Food Classics bought the Ontario factory in 2010, the company said it would invest more than $5-million in the operation.

However, as beef prices soared in late 2010, New Food Classics was squeezed because it had entered fixed-price contracts with many customers. The company was unable to pass along the added input costs to the grocery stores it supplies, which include Loblaws and Wal-Mart. In the first nine months of 2011, the company lost about $8-million on sales of $82-million, according to court filings.

As the business was deteriorating, New Food Classics shut down its Alberta plants and put them up for sale. The company also relocated its head office to Ontario to be closer to clients. The company planned to hire almost all new headquarters staff. It also installed a new accounting software system. The timing was bad, according to the monitor hired to oversee the company's restructuring.

"As a result of the complete turnover of accounting staff and the change in accounting platforms, NFC's management was unable to fully identify the substantial losses that the company was incurring in 2011 or rectify the situation in a timely manner before it had a material adverse impact on the company's financial situation," the monitor said in a report.

In addition, startup costs at the new Ontario plant went over budget, and the cost of closing the Alberta facilities ate into the company's cash reserves.

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EdgeStone lent the company $2.5-million in two tranches, one in late 2010 and another in early 2011. The company also sold its Saskatchewan plant in a sale-leaseback deal, and used the funds to pay down debt. But the business grew worse and attempts to restructure outside of court protection failed.

EdgeStone declined to invest any more money in the business, as did Bank of Montreal, the company's main bank.

BMO has since agreed to provide debtor-in-possession financing.

Toronto-Dominion Bank and Bank of Montreal are secured creditors. According to the monitor, BMO should get its money back. The monitor said it needs a more detailed review before determining whether TD will get any funds.

(You can read all the court filings on the monitor's web site here.)

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