Maple Leaf Foods is a leading Canadian food processing company. The company operates in Canada, the US, and the UK manufacturing both protein and bakery products which it sells to a variety of end users including retail, foodservice, and grocery store chains.
All amounts in C$ unless otherwise noted.
Maple Leaf announced an agreement to sell its Rothsay rendering and biodiesel division to Texas-based Darling International, for $645 million.
We believe this represents a fair purchase price and note that the transaction is: (1) accretive at the EBITDA level; and (2) will allow for a meaningful reduction in net debt from currently elevated levels. Incorporating the transaction and rolling forward the estimates used to generate our target price from 2013 to 2014, our target price moves to C$15.00 (from C$13.50). However, we maintain our HOLD rating.
The transaction is accretive at the EBITDA level. Given that Rothsay generated $85 million of EBITDA in 2012, Darling is paying 7.6x 2012A EBITDA for the division. This is above Maple Leaf’s current multiples of 7.2x 2012A EBITDA and 7.0x 2014E EBITDA.
Management stated that it will use the proceeds to pay down debt. Post closing of the transaction expected at year-end, we forecast net debt/EBITDA of 2.2x. This represents a meaningful improvement from our prior 4.0x estimate. We note that it also gives management considerably more latitude in capitalizing on core business related opportunities, while also potentially expediting the return of capital
Our 12-month target represents 7.2x 2014E EBITDA. While we view Maple Leaf’s divestiture as positive, and remain constructive on the name longer term, the next few quarters are expected to remain pressured by volatile commodity costs and increased transactional costs as the company implements its Value Creation Plan. As a result, we believe investors should wait for a more attractive entry point