Canadian dairy heavyweight Saputo is under fire from New York investment firm Spruce Point Capital Management.
Among prominent short-seller Spruce Point’s complaints is a claim Saputo has overpaid for acquisitions.
Hedge fund Spruce Point, which admitted it has a “short position” in Saputo and owns derivative securities that stand to net benefit if the company’s share price falls, released a lengthy report yesterday (29 November) attacking the company on a number of fronts. Other areas under scrutiny are Saputo’s financial transparency and commitment to ESG matters.
It claimed: “After years of an aggressive global M&A expansion strategy, Saputo is struggling against organic EBITDA decline as a result of negative trends in dairy consumption, inefficient operations and escalating environmental compliance costs among other things”.
Saputo, which in September outlined a global plan to modernise its operations and cut costs, linked to an aim of achieving adjusted EBITDA of CAD2.13bn (US$1.57bn) by fiscal 2025, said the report is “without merit”.
Spruce Point suggested Saputo’s global strategic plan to “combat its struggles” will “ultimately fail”. It argued Saputo has “an untenable cost structure in a thin margin, low to no growth industry”.
Saputo is listed on the Toronto Stock Exchange. Its share price fell by as much as 7.8% to CAD31.62 after the Spruce Point report was published yesterday before recovering later in the day to close at CAD32.26.
In its report, Spruce Point suggested Saputo’s difficulties included “inefficient logistics and operations, key customer loss, high wage costs, a focus on branded versus private label and limited R&D spending to succeed in the burgeoning plant-based dairy business”.
The investor suggested Saputo, which as well as its domestic market has operations in the US, Europe, Argentina and Australia, will have increasing difficulty covering its dividend.
On the dairy firm’s M&A activity, Spruce Point said: “Saputo’s aggressive acquisition spree shows signs of struggle. Saputo recently gave itself an overly positive assessment of its acquisition track record, claiming that perhaps one or two haven’t performed as planned. However, Spruce Point believes there are multiple acquisitions across the globe where Saputo overpaid for companies that did not ultimately stimulate organic growth.”
It suggested that Saputo’s acquisition of UK peer Dairy Crest in 2019 brought to it a CAD724m “hidden” pension obligation that had not been factored into the company’s valuation.
It added: “Many subtle signs of growing financial stress have emerged at Saputo, while disclosures and transparency decrease. Spruce Point’s findings at Saputo are consistent with those of many of the companies we have analysed over the years that are experiencing increasing financial stress, which is often accompanied by reduced investor transparency and disclosures.”
In a statement sent to Just Food responding to Spruce Point’s criticism, Saputo said: “Saputo confirms that Spruce Point Capital Management has never engaged with the company. Saputo is of the opinion that the report is without merit and that it contains mischaracterisations and incorrect information, which are misleading and solely intended to benefit the author.
“The company remains focused on its Global Strategic Plan initiatives and driving sustainable, profitable growth for all its stakeholders.”
Earlier this month, Saputo said it was looking closely at its global facilities network following the announcement of the closure of a plant in Australia.
In the three months to 30 September, the company saw its overall revenues increase by 20.9%, year-on-year, to CAD4.46bn. Adjusted EBITDA was up by 30.4% to CAD369m.
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