Tuesday, June 26, 2007

Ottawa blamed for E.D. Smith sellout

Hey, jams and jellies one day , the energy and telcom sectors the next. Sounds like a plan:

TreeHouse Foods' purchase is latest income fund sold to foreigners since Flaherty's Halloween announcement
by JOHN PARTRIDGE, June 26, 2007

If it had not been for Ottawa's surprise attack on income trusts last Halloween, E.D. Smith & Sons Ltd., the iconic Canadian jam and sauce maker, would almost certainly still be pursuing the aggressive strategy it launched two years ago - on its own.

Instead of continuing to expand into the United States and broadening its product line, the capital-strapped income trust that owns the 125-year-old Winona, Ont., firm is selling out to a U.S. company for $217-million or $9.15 a unit in cash. It is blaming federal Finance Minister Jim Flaherty's controversial decision for the move that will end its independence.

The announcement yesterday of the sale to TreeHouse Foods Inc. of Westchester, Ill. came just over six months after E.D. Smith slashed distributions to unitholders, parted company with then president and chief executive officer Michael Burrows and hired Toronto investment bank Genuity Capital Markets to conduct a strategic review.

"I would say it's highly unlikely this process would have taken place without the change in the legislation," Bruce Smith, the company's chief financial officer - but not a member of the founding family - said when reached at head office. "It created challenges for us to raise capital and was one of the leading reasons we got into this strategic review process."

Like any chief executive officer worth his or her salt, E.D. Smith's acting CEO Martin Thrasher would probably have preferred to keep the company forging ahead independently. But he diplomatically declined to say so when reached yesterday afternoon.

"It's really not a matter of preference," he said. "We have to deal with the realities of the marketplace. We have really transformed this company in the last two years, and, yes, we have some very aggressive growth ambitions.

"That's why we think this match-up with TreeHouse works so well."

Close to 20 publicly traded income trusts have been sold - mostly to foreigners and private equity firms - or put up for sale since Mr. Flaherty's controversial announcement, although he has rejected suggestions the decision to tax trusts down the road is to blame.

On Friday, the Senate approved Bill C-52, which includes the trust tax.

E.D. Smith was incorporated in 1882, but traces its roots to 1878, when its namesake founder, Ernest D'Israeli Smith, then a bachelor farmer, later a married MP and then Senator, began growing strawberries at his property in Ontario's Niagara Peninsula. It now produces jams, salad dressings and other sauces both under its own brand and for private labels.

The senator's great grandson, Llewellyn Smith, sold the family company to Imperial Capital Corp., a private equity firm in Toronto, in 2002, and in May, 2005, Imperial took the food processor public as an income trust in an initial offering that raised $110-million at $10 a unit.

TreeHouse, which bills itself as the largest maker of pickles and non-dairy powdered creamers in the United States, also will assume E.D. Smith's existing debt and the costs of the transaction. This will put the total value of the transaction at $313-million, Mr. Thrasher said during a conference call with analysts.

Assuming the TreeHouse deal is consummated, unitholders should receive up to $9.15 a unit, less a holdback of up to 60 cents to cover certain expenses, the fund said.

This is $1.71 or 23.3 per cent higher than the price of $7.34 at which the units closed on the Toronto Stock Exchange Friday, but is $3.04 below the all-time high of $12.19 they hit in August, 2005.

The takeover must be approved by two-thirds of the votes cast at a special meeting the fund will hold for unitholders and is expected to close by the end of August, E.D. Smith said.

TreeHouse, which is more than four times larger than E.D. Smith, has the right to match any competing offer and would be paid a termination fee of $8-million if the Canadian firm's board of trustees decides to accept another bid, the fund said.

However, the board is unanimously recommending acceptance of the U.S. firm's offer. "We have conducted an extensive review of the strategic alternatives available ... and believe this deal provides our unitholders with an attractive price for the business and a material premium to the recent trading level of the units," Jack Scott, the fund's chairman, said in the statement.


Anonymous said...

E.D. Smith is one of the trusts that gave Diane Urquhart her 15 minutes of fame.

This trust had some aggressive growth plans, which it could not pursue because Flaherty dried up their sources of capital. But now I have a question. Isn’t the trust structure was for designed for the stable, slow growth business? Although E.D. Smith is small jam, it was one of the many businesses that rushed to become a trust, and that helped give the trust sector a bad name.

E.D. Smith oversold themselves with a higher distribution that they did not sustain. Enter stage nasty—Diane Urquhart, phony protector of Canadian seniors. She’s no friend of mine.

So it’s probably a good thing for Canadian investors that E.D. Smith is leaving the trust scene. But is it good for Canada? Well, probably not. If E.D. Smith were to stay a trust, Canada would receive about $5.5 million a year in taxes, and there are Canadian job jobs in Winona, Ontario.

It’s not likely that the American company will pay Canadian taxes. They’ll use a leveraged buy-out, and remove taxable income with interest expense (withholding tax is gone), capital cost write-offs, lower transfer prices, and inter-company overhead charges. Of course, they’ll use good tax lawyers and accountants and everything they do will be legit, because who wants to get in a beef with Canada Revenue anyway? Bottom-line: no Canadian tax revenue.

The other thing is jobs. The American buyer is four times bigger. In about 4 years, when the lease is up, expect the plant and jobs to move to Ohio.

Anonymous said...

What suprises me is the complete inability the Canadian Press has in connecting the dots on Income Trusts. Company gets bought > Head office jobs and expertise is gone to the US followed by factory jobs latter and nothing but yawns from the public and minimal reporting in the press.

Too bad Canada. If you want to continue to be the 'branch plant' to the US this is a great road to follow.

Meanwhile guys like me will follow the money, I can invest anywhere to make the return I need to make, and Canada isn't a place I will do it because there will be:

-fewer investment choices going forward.
-I'll go where the investment climate is less hostile and more predictable.

ilanit said...

A broker in commodity based derivatives working mainly with financial counterparty will have less issues implementing the directive. Their business is basically a Los Angeles business investment business and some of the principles behind the details of MiFID and CRD clearly apply to them.

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