TORONTO - Pet food maker Menu Foods Income Fund, the Toronto-based company that was embroiled in a massive pet food recall three years ago, has reached an agreement to be purchased by one of its competitors.
Arkansas-based Simmons Pet Food Inc. said Monday it will pay $239 million for the company following a strategic review by Menu saw it put itself up for sale.
The acquisition ends another chapter in the private-label contract manufacturer's troubled recent history, which has focused primarily on recovering from a tainted food scandal in 2007.
Menu (TSX:MEW.UN) recalled at least 60 million cans and pouches of cat and dog food after it was discovered that some products imported from China contained melamine, a deadly chemical, that got into its supply chain and caused some animal deaths.
The company survived but the recall cost it tens of millions of dollars, produced big losses, led to cancelled contracts and battered its stock price.
"The company had been through some serious challenges about three years ago and we're recovering from those very well," chairman Ian Ross said in an interview.
"The board concluded that it was timely in February of this year to launch a strategic process to identify whether or not we could realize some value for our very patient unitholders, who had seen the stock deteriorate significantly in 2007.... We felt there was an opportunity to see if there was a transaction we could do from strength rather than weakness," he added.
Later Monday, Menu Foods reported lower profits and revenues for its second quarter. The company said it earned $1.7 million for the three months ended June 30, compared with earnings of $3.9 million a year ago.
Sales dropped to $61.7 million from $69.4 million as the company was affected by currency translation effects on its books.
"Our second quarter performance continues the trend begun in 2009, and represents Menu's sixth consecutive profitable quarter," stated Paul Henderson, president and CEO.
"During the quarter we saw volume double in our new, high-margin cup format and had strong performance in our continuing business, which grew by 7.5 per cent per cent in the quarter."
The manufacturer, headquartered in Mississauga, Ont., said earlier in the day that investors and other owners of about 45 per cent of Menu Foods' units have agreed to sell their shares to Simmons in the friendly deal.
After the disposition of the fund's assets, the units of the fund will be redeemed for $4.80 per unit in cash. That represents a 65.5 per cent premium to the March 15 closing price of $2.90, the last trading day prior to the fund's announcement that it would begin a strategic review.
The share price is also a 46.8 per cent premium to the closing price of $3.27 on Aug. 6.
Shares in Menu soared $1.45 or 44 per cent to $4.72 Monday on the Toronto Stock Exchange.
The deal is subject to the approval of two-thirds of the fund's unitholders at a special meeting expected to be held in September. The sale is expected to close in the fourth quarter.
"With this transaction, we are adding one of North America's leading private-label pet food manufacturers to our portfolio and further strengthening our company," said Mark Simmons, chairman of Simmons Foods Inc. and affiliates.
"Menu is a great company with an excellent management team and employees that are among the best in our industry, and we look forward to welcoming them into the Simmons family."
A representative for Simmons declined to make any comment separate from the press release and would not confirm nor deny whether the company would cut jobs at Menu's operations, which are based in Kansas, New Jersey and Mississauga.
However, Ross said he doesn't expect any major changes.
"My understanding is that they view Menu as a well-managed and efficient operation, and we don't anticipate any significant changes in the operations," he said.
Menu Foods had been in the midst of a lengthy recovery period that saw it tighten its operations in the wake of reduced sales following the tainted pet-food scare.
In May, the company reported a first-quarter profit of $5.7 million. This was a significant jump over the $100,000 profit booked a year earlier, but it was on the back of broad changes to its cost structure. Revenues tightened to $63 million in the period, down from $84.1 million.
Simmons has annual sales of more than US$1 billion.
The Simmons group includes Simmons Pet Food, a manufacturer of wet and dry pet food, and dry ingredients for dairy, cattle, aquaculture and pet food manufacturers.
Menu Foods will leave behind it a significant footnote in the history of pet food safety, according to one industry observer.
"Consumers finally realized for the first time ever that the name of the company on the package isn't necessarily where that food is being made," said Debbie Phillips-Donaldson, editor-in-chief of Petfood Industry, a trade publication.
In March 2007, investigators banned imports of wheat gluten from the Xuzhou Anying Biologic Technology Development Co. in China after finding melamine — a chemical used in plastics, countertops, glue and fertilizers — in samples of recalled wet and dry pet food and treats.
The chemical was also found in cats and dogs who died after eating the contaminated food.
Several other pet food makers in North America had to recall pet food after receiving contaminated wheat gluten from the same source.
Phillips-Donaldson said that the Menu Foods recall played a role in the U.S. Food and Drug Administration introducing stricter legislation for food safety.
"I think it opened a lot of eyes to how much more proactive they (pet-food makers) need to be in terms of how they source ingredients, the suppliers they work with," she said.