If Weston sells its bakery business, the ‘rationale’ for holding company comes into question, analysts say

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If the planned sale of the 139-year-old Weston Foods bakery business goes through, will there be any reason for George Weston Ltd. to exist?

That’s a question analysts have been asking this week, ever since the holding company controlled by Canada’s Weston family announced it was putting its baked goods division on the block.

In addition to Weston Foods, George Weston owns 52.6 per cent of grocery retail giant Loblaw Companies Ltd. and 61.8 per cent of Choice Properties Real Estate Investment Trust , which holds a broad portfolio of retail, industrial and office properties, many anchored by Loblaw stores.

The bakery business accounts for less than 10 per cent of George Weston’s revenues. But without it, the holding company’s corporate structure comes into question, Bank of Montreal analyst Peter Sklar wrote in a research note Friday.

An “obvious” move would be for the company to spin out Loblaw and Choice REIT and wind up George Weston, he wrote.

That said, a spinout may not happen, he added, noting that “it appears the company is adopting an alternative approach which should create value by narrowing the discount, although not approaching the magnitude of value that could be created by the spinout option.”

That discount Mr. Sklar referred to is commonly applied to the shares of holding companies. Investors often prefer “pure plays” on businesses rather than indirect ownership structures. As such, analysts say George Weston’s stock price does not reflect the full value of its holdings. Its shares trade at a 15-per-cent pro forma discount, Desjardins analyst Chris Li noted. “As there is better visibility from the sale and use of proceeds, we expect the [holding company] discount to narrow to [approximately] 10 per cent,” Mr. Li wrote in a note this week.

George Weston shares rose more than 5 per cent Tuesday on the news of its intention to sell the bakery business, closing at $107.96. By Friday afternoon, the shares were up slightly, trading in the $109 range.

George Weston executives indicated Tuesday that proceeds from the sale would most likely be used to return cash to shareholders through share repurchases.

“As a holding company, [George Weston] will have an interest in two publicly traded vehicles that shareholders can simply hold separately,” Bank of Nova Scotia analyst Patricia Baker wrote in a note this week. “Any decision to hold [George Weston] shares at that time would presumably depend on the capital allocation strategy and the company’s longer-term view on enhancing retail or real estate holdings, independent of [Loblaw] or [Choice Properties]. Otherwise, many will question the rationale for this publicly traded holding company.”

The Weston empire is in the midst of major changes to its executive ranks. Along with the announcement of the bakery sale, on Tuesday the company announced a management reshuffle at Loblaw, which will see president Sarah Davis and chief financial officer Darren Myers leave the company on May 6. George Weston chairman and chief executive officer Galen G. Weston will return to his role running the grocer as chairman and president, and George Weston CFO Richard Dufresne will replace Mr. Myers. Both will continue their roles with the holding company as well. And Loblaw will have a new chief operating officer in Richard Sawyer, a retail executive who was formerly COO at competitor Metro Inc. and CEO of retailer Rona Inc.

George Weston’s major shareholder, Weston family-controlled Wittington Investments, Ltd., will also get new leadership. Corporate lawyer Cornell Wright, currently a partner with Torys LLP, will join Wittington on May 1 as executive vice-president and will be appointed president at the end of this year, replacing Pavi Binning. That appointment was disclosed this week in an annual regulatory filing from BCE Inc. , which has nominated Mr. Wright to its board of directors.

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