Posted on 16 December, 2010 | 73 Comments
Long term shareholders of George Weston cannot be happy right now. No matter how the company window dresses today’s announcement of it special one-time $1 billion dividend, shareholders know there was a huge missed opportunity.
Back in January 2009, at the height of the credit crisis and stock market crash, George Weston Limited was the envy of capital markets. The financial world was collapsing, banks were teetering, IPO filings were shelved, mergers and acquisitions terminated, and liquidity all but vanished overnight. Companies were on life support, and were it not for the emergency assistance of central bankers pumping trillions of dollars into the economy, many companies would have indeed gone bankrupt.
But George Weston stood out as the exception. It was flush with cash as it had just sold its US bakery business for $2.3 billion to Mexico’s largest bakery, Grupo Bimbo. Not in a hundred years could a company be better positioned to feast on such famine.
Even back then, the company could have decided to conservatively pay out a large shareholder dividend while maintaining the remaining cash flow to make a strategic purchase that would have produced synergies for the Weston family of holdings. This was one of those rare times when you get to have your cake and eat it too.
Saks (ticker symbol: SKS) was one company that looked ripe for the picking and would have fit nicely with the Weston family’s portfolio of luxury retailers around the world including Holt Renfrew (Canada), Selfridges (UK), and Brown Thomas (Ireland). And while it is unrealistic to fault Weston for not buying at the March 2009 low when the stock hit $1.79, certainly one could have made a strong business case to buy in around the 2009 average price of $5.00 which would have valued Saks at around $800 million USD – a valuation that was well within Weston’s financial reach. Today, stock in Saks has more than doubled as America’s wealthiest fashionistas are back. Profitability is up and Saks now trades near $12 with a market cap close to $1.8 billion USD.
Another strategic fit would have had George Weston pursue investment opportunities within the real estate sector, given that the company indirectly owns a huge real estate portfolio though its 60% holding in Loblaws. Loblaws is estimated to own somewhere between $8 to $10 billion of real estate alone so Weston and its portfolio of companies are no strangers to executing large real estate transactions. In fact, with some creative ingenuity, Weston might have further thought about teaming up with any number of large players including REITS, pension funds, and private equity players in lending its expertise in property management.
But instead of leading the charge in acquiring highly desirable real estate at fire sale prices south of the border or building an equity stake in any plethora of US retailers, the company chose the worst of all alternatives – ‘the do nothing’ approach.
For blown opportunities, this will certainly go down as one. Of course, George Weston Limited is attempting to put a favourable spin on a decision that was long overdue. In all likelihood, the company has missed the boat and it would be surprising to see George Weston make a foray into any familiar or new industries.
In fact, we view this dividend payout as the first step in a major re-structuring by the George Weston parent company. While ten years ago, George Weston owned a diversified set of businesses ranging from bakery to dairy to grocery to pulp and paper; today the company owns two significant yet straightforward businesses: Canada’s largest bakery and Canada’s largest grocer.
We, at Frontwater Capital, believe that this is the end of the parent company, George Weston Limited, as the market knows it. By spinning out the bakery business into a public company while distributing pro rata shares of Loblaws to its existing shareholders, the company could easily do away with the additional overhead of having a parent company oversee two businesses that can operate just as well as standalone companies. Furthermore, any excess cash could then be paid out via an additional special dividend.
Given that the parent has proven itself to be a conservative, no risk taker, it just makes good business practice to break the company up into individual pieces. Doing so would likely unlock at least another 15% or $13 of shareholder value.
Regards,
Jeff Kaminker
President, Frontwater Capital
December 16th, 2010 at 9:35 am
[...] This post was mentioned on Twitter by Frontwater Capital, Frontwater Capital. Frontwater Capital said: Read About George Weston's $1Billion Blown Opportunity http://bit.ly/hRq5Sv [...]
July 4th, 2012 at 4:44 am
http://forum.belmont.edu/business/2008/05/24/starting-the-conversation...
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