Saputo shares drop after short seller attacks its acquisition strategy


Report from Spruce Point Capital casts Saputo as a bloated, aging cheese empire now in a ‘decline and restructuring’ phase

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Saputo Inc.’s shareholders were having a pretty good year. The Montreal-based dairy giant’s stock price is up more than 10 per cent this year, much better than the S&P/TSX composite index, which is down about five per cent. The company’s most recent financial report showed earnings before interest, taxes, depreciation and amortization were 30 per cent higher in the second quarter than a year earlier.

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A Wall Street short seller appears set to ensure Saputo’s year ends on a sour note.

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Saputo’s stock price dropped as much as 7.8 per cent on Nov. 29 after Spruce Point Capital Management LLC, an investment management firm with a short position in Saputo, released a 147-page report that cast Saputo as a bloated and aging cheese empire that is now in a “decline and restructuring” phase.

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“We believe Saputo’s aggressive global expansion through M&A is failing, transparency is declining, and financial stress is mounting,” Spruce Point said, adding that it stands to benefit financially from its short position if Saputo’s share price falls.

We believe Saputo’s aggressive global expansion through M&A is failing, transparency is declining, and financial stress is mounting

Spruce Point

Short sellers have a mixed reputation. They’re gamblers, making deals to borrow shares or other financial assets that they think are overpriced, betting they can make good on the transaction by purchasing the assets later at a lower price. Some think short sellers are good for average investors because they have the resources to hold the managers of big corporations accountable. At the same time, those short sellers have an incentive to exaggerate and amplify their findings in order to cause a run on the stock.

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It’s unclear where Spruce Point sits on that spectrum. What is clear is that some investors take the firm seriously, as Saputo’s stock ended the day at $32.26 per share, six per cent lower than the previous close and 10 per cent lower than Nov. 17, when the stock touched its highest price since the summer of 2021.

Spruce Point said it estimates a 40-60 per cent “downside risk” to Saputo’s share price once more investors realize that the company’s global expansion isn’t paying off to the extent management promised.

Saputo fired back in a statement, saying Spruce Point never engaged with the company’s leaders during its research and accused the short seller of misrepresenting the facts. “Saputo is of the opinion that the report is without merit and that it contains mischaracterizations and incorrect information, which are misleading and solely intended to benefit the author,” the company said in an email.

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The Spruce Point founder dared Saputo to be more specific.

“That statement, to us, is a rather boiler-plate statement,” said founder and chief investment officer Ben Axler. “We challenge the company to be specific in terms of where we are incorrect.”

Saputo is of the opinion that the report is without merit and that it contains mischaracterizations and incorrect information

Saputo statement

Spruce Point has come after Canadian champions before. It made profitable bets against Lightspeed Commerce Inc. and Nuvei Corp. in 2021, but did less well in campaigns against Dollarama Inc., Canadian Tire Corp. Ltd. and GFL Environmental Inc., according to the Globe and Mail.

Six of nine analysts tracked by Bloomberg LP rate Saputo’s stock a “buy,” while two see it as a “hold,” and one recommends selling it, the financial data company’s news arm reported.

Since Lino Saputo Jr. succeeded his father, founder Lino Saputo, as chief executive in 2004, Saputo has made a flurry of acquisitions in Canada, the United States, Australia and the United Kingdom. The company now boasts that its facilities around the world process around 11 billion litres of milk per year.

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Spruce Point said the acquisitions haven’t paid off.

“Saputo’s aggressive acquisition spree shows signs of struggle,” Spruce Point said in a news release. “Spruce Point believes there are multiple acquisitions across the globe where Saputo overpaid for companies that did not ultimately stimulate organic growth.”

At the same time, Spruce Point alleges that the company is showing “subtle yet striking evidence” that it has lost ground in its home market of Canada and doesn’t have strong enough plant-based dairy brands to stay ahead of changing consumer tastes and “declining dairy consumption.”

The report said the company quietly stopped referring to itself as “the” leading dairy processor in Canada, preferring instead to call itself “a leading cheese manufacturer and fluid milk and cream processor.” That change appears to have occurred sometime between June and July 2019, according to different versions of the “Canada Sector” on Saputo’s website, archived by the WayBack Machine.

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