Ontario Teachers' Pension Plan has cut all ties with Maple Leaf Foods by launching a $362-million public share sale to rid itself of a lingering 25 per cent stake in the food processing company.
To convince investors to take the plunge and buy into a company that has had a tumultuous past few years, the shares were offered at a deep 17-per-cent discount to Maple Leaf's last trading price. That means Teachers immediately loses out on $76-million.
By selling, Teachers signals that it sees no chance of Maple Leaf turning around in the near future.
Initially, Teachers set out to sell a 15-per-cent stake and keep a 9.86 per cent position in Maple Leaf, but that changed after investors jumped at such a steep discount. Ultimately the deal value was increased from $220-million to sell all of Teachers' shares.
The deal marks the second time Teachers has unloaded Maple Leaf shares in 2010. Shortly after a long-standing shareholder agreement between the two groups expired in June, the pension fund sold a 10-per-cent stake directly to hedge fund West Face Capital. Now Teachers has sold the remainder of its shares publicly, which allowed them to be snapped up by any buyer.
West Face Capital has not publicly stated how it feels about Maple Leaf CEO Michael McCain's plans to spend more than $1-billion to shut inefficient plants and acquire more efficient equipment. For investors as a whole, however, some analysts see upside potential in owning the company.
Tuesday's offering caught Maple Leaf by surprise. "We actually were unaware of this deal until late this afternoon," said chief financial officer Michael Vels on Tuesday. He added there was no way the company could have known the transaction was being put together because it was a negotiated deal between Teachers and the banks who underwrote the offering.
Unlike its first sale of Maple Leaf stock, Tuesday's transaction was sold through a public bought deal. That means the investment banks, in this case BMO Nesbitt Burns and TD Securities, purchased the 34.5 million shares and cut Teachers' a cheque right away. With Teachers out of the picture, had the deal not sold, any liability would have fallen on the two banks' balance sheets.
That might explain why such a deep discount was required. Teachers wanted to sell its position, but the banks would only take on the risk if the shares were sold at a deep discount to the market price. That risk is magnified by the fact that only two underwriters were involved. Typically a deal of this size will have four to six banks involved.
Teachers said the discount was "merely a function of the size of the deal," and declined to comment on all other matters.
Although Maple Leaf was caught off guard by the offering, Mr. Vels stressed the sale does not affect management's vision. "A change between shareholders doesn't change the fundamental value of the company."
Asked whether new shareholders could breathe new life into the company because they may not be at odds with the firm's plans to invest heavily in capital spending to lower costs, Mr. Vels would not add much colour. "We wouldn't have a perspective on that. All of our shareholders are important," he said.
Jim Durran of National Bank Financial recently estimated Maple Leaf could be worth more than $16 if the meat and bakery businesses were broken off. And if management at Maple Leaf can deliver on its plan to improve profits, Mr. Durran forecasts the stock could top $15 by the end of next year – if the company stays together.
With files from Boyd Erman