11 January 2013

Canadian hog market continues to go through pigs and troughs

Hog production in Canada is not be the first thing that springs to mind when thinking about M&A activity but it is an interesting side step away from the global and regional reports which inundate the email inbox at this time of the year. Before launching into this sector it is worth mentioning the value of global M&A fell for the fifth consecutive year in 2012 to 65,060 deals worth a combined USD 3,144 billion, the lowest level recorded both by volume and value since 2004, according to Zephyr, the M&A database published by Bureau van Dijk.

However, against this wider global decline, the value of deals targeting Canadian companies has actually been on the rise in recent years, hitting a heady USD 154,035 million in 2012, the highest recorded since 2007 when a total of 5,274 transactions worth a combined USD 255,110 million was signed off in the country.

Meanwhile, the value of global deals targeting hog farming companies continued to form a series of peaks and troughs in 2012, declining to USD 811 million from USD 1,650 million in 2011 (2010: USD 338 million; 2009: USD 3,037 million; 2008: USD 287 million; 2007: USD 319 million), according to Zephyr. Of the 61 industry transactions recorded for the year, the third and fifth highest featured a Canadian target, namely Big Sky and Puratone, respectively.

Canada is a leader in the international pork industry, ranking third in terms of export volume and seventh in terms of production. Domestically, hog production and pork exports add CAD 13,400 million (USD 13,583 million) to the country’s economy as well as having a net value-added contribution to gross domestic product of USD 4,100 million, according to a study prepared for the Canadian Pork Council in the last quarter of 2012. The segment also: accounts for 75,000 jobs at the processing, farming and other supplier levels; generates CAD 2,200 million in wages, salaries and other benefits; and provides taxes of CAD 350 million on products and a further CAD 460 million in personal income taxes.

With this in mind, the kind of damage the recent drought in the US corn belt may wreck on Canada’s hog farmers in the coming year cannot be underestimated as increased costs of animal feed supplies such as corn and soy meal put pressure on livestock producers, leading to a shortage of pork products and impacting economic activity associated with the segment.

Two of Canada’s leading hog producers have already felt the strain; Puratone, one of the top three swine companies in Manitoba, filed for bankruptcy last year blaming spiking feed expenses, the strong dollar and the global recession. This was quickly followed by Saskatchewan's largest hog producer, Big Sky, which collapsed with debts pegged at between CAD 69.00 million and CAD 75.00 million, despite restructuring a little more than three years ago.

Luckily, neither of these two firms have had to liquidate their stock: privately-held pork processor Olymel grasped the opportunity to diversify its business, stepping forward to acquire Big Sky in a deal valued by Reuters at USD 66 million while local butcher, baker and pasta maker Maple Leaf decided to pay out about CAD 42 million for Puratone in order to corner the Manitoba hog supply market.

The new year has barely kicked off and yet there has already been one announced deal worth USD 57 million involving a hog producer and yes, you have guessed it, it involved a Canadian target. This time it is not an acquisition but an investment. Japanese trading house Itochu has injected JPY 5,000 million (USD 57 million) into Manitoba-based pig farmer, processor and exporter HyLife in return for a 33 per cent stake.

© Zephyr