Spruce Point Capital Management LLC questions the success of Saputo’s acquisitions and thinks a tough global market for milk consumption means the company will have increasing difficulty covering its dividend. In its 147-page report, Spruce Point says it sees 40 per cent to 60 per cent downside in the company’s shares, with a fair value of $13.75 to $20.50 per share.
Short-selling shares is a bet that shares will drop. An investor borrows shares, sells them and repays the loan by returning new shares, hopefully bought at a lower price. Spruce Point chief executive officer Ben Axler would not say how large the firm’s Saputo short position is, citing his company’s policy and U.S. securities laws that restrict investment funds’ public statements.
Spruce Point argues Saputo has a high cost structure “in a thin-margin, low-to-no-growth industry.” Consumers worldwide are consuming less milk, and those who do are increasingly buying private-label products, versus the branded dairy Saputo emphasizes. Spruce Point believes Saputo’s acquisitions aren’t contributing meaningful organic revenue growth, contrary to CEO Lino Saputo’s recent comments on a conference call that out of roughly three dozen companies Saputo has bought since going public, “every single one of those acquisitions with the exception of one or two have driven a benefit for us. Whether it is product diversification, getting into new categories, getting into new regions, into new countries, they all made sense for us.