Mergers and acquisitions activity has always attracted media attention. Big names and big numbers make for interesting headlines, however, we seldom look back at past acquisitions to find out whether the expected objectives where achieved. We have selected two large transactions in the food processing industry and have performed a high level review of the initial anticipated benefits and synergies, what the buyer and/or the investment community is currently saying about these past transactions and whether the key objectives of the transactions were realized.

The J.M. Smucker Company acquires International Multifoods Corporation
On June 18, 2004, The J.M. Smucker Company ("JM Smucker") acquired Minneapolis-based International Multifoods Corporation ("IMC") in a transaction valued at approximately $871 million USD. At the time, IMC had annual sales for its latest year that ended in February 2004 of approximately $908 million USD. At the time of the acquisition, JM Smucker had indicated that the acquisition would increase its sales by more than 50% and that synergies should add to profits over the next three years.

Specifically, management anticipates it will generate benefits ranging from $40 million USD to $60 million USD over the next three years following the acquisition through increased sales, leveraging the combined distribution network and through overhead reduction. Management also indicated that the IMC acquisition was in line with its strategy which was to "own and market North American icon brands that are sold in the centre of the store and that hold the number-one market position or have the potential to do so".

Approximately eleven months after the acquisition, in its annual report for the year-ended April 30, 2005, JM Smucker reiterated the fact that IMC was still in line with its strategy as it enabled them to add leading brands to their portfolio. On the operating side, it appeared that IMC contributed to a 45% increase in sales, which was close to the initial expectation of JM Smucker (considering only eleven months had passed).

However, lower IMC brand margins contributed to a decrease in the overall operating margin (decrease from 12.9% to 10.8%) even though operating income increased during 2005. The annual report indicated that the operating margin was also affected by restructuring, merger/integration costs and other factors.

It would appear that JM Smucker has not yet fully realized the operational benefits it had anticipated back in June 2004, however, it had announced that only small benefits were anticipated in the first year. Therefore, at this time, one can not say that JM Smucker is not in line with the original projections. It will be interesting to follow JM Smucker over the next several years to see if the anticipated benefits will be realized as planned.

Maple Leaf Foods Inc. acquires Schneider Corporation
On April 5, 2004, Maple Leaf Foods Inc. ("Maple Leaf") acquired Schneider Corporation ("Schneider") for $378 million CAD. In its 2003 annual report, Maple Leaf had already disclosed its agreement to acquire Schneider and indicated that Schneider would "transform the Meat Products Group as it significantly increases the mix of products, which were to result in higher margins and more predictable cash flow and earnings." In its financial year ended April 27, 2003, Schneider reported sales of $1.24 billion CAD and earnings from operations of approximately $54 million CAD.

In its annual report for the year ended December 31, 2004, which was issued approximately nine months after the transaction was completed, Maple Leaf reported a 26% sales increase mainly due to the Schneider acquisition. The addition of Schneider enables Maple Leaf to now operate with its three "national power brands" (Maple Leaf, Schneiders and Dempster's). In the Fiscal 2004 annual report, management indicated that integration costs had been immaterial in Fiscal 2004 but that $10 million CAD may be spent in Fiscal 2005 for integration and other additional restructuring activities.

Analyst reports regarding the Maple Leaf and Schneider transaction indicate that the acquisition provides a positive shift in sales mix which should enable more stable earnings. This was reflected in the results for the second quarter of Fiscal 2005 which showed an increase in earnings before interest, taxes, depreciation and amortization of the Meat Products Group of 16%.

Observations
While both of the above-noted transactions have had approximately the same integration time with respect to their acquisitions, it appears that Maple Leaf has already begun to significantly benefit from its transaction with Schneider. On the other hand, it appears that JM Smucker will require the full three years, as originally projected, to properly realize the expected benefits from the transaction. Both Maple Leaf and JM Smucker appear to have properly identified the proper time-frame over which to realize the expected benefits.

In properly executing a merger or acquisition, it is important to identify the expected benefits and synergies of the transaction, and develop and implement a detailed and complete integration plan.

Other topics in the current issue
The Fall 2005 edition of Food for Thought includes an evaluation of the devastating effects of hurricane Katrina on the seafood, sugarcane, and fruits and vegetables industries. A preliminary assessment issued by the Office of the Chief Economist estimates the total production losses in the agriculture, fish and forest industry to be $882 million USD. These effects will reverberate through the broader food industry over the coming months. In addition, this issue of Food for Thought includes:

• A look the potential impact of avian flu virus on North American food processors
• Highlights of the U.S. federal government's new local school wellness policy to promote nutrition
• An update on M&A activity in the third quarter of 2005
• Highlights of financing activity for the third quarter of 2005, and
• Financial data on food processors in Canada and the U.S.

For more information on mergers and acquisitions please contact Doug McDonald at (416) 601-4661 or Russell David at (514) 393-7358. For more information on how to develop and execute a transaction due diligence and a merger integration plan, please contact Charles Knight at (416) 643-8329 or Michel Gallant at (514) 393-3542.