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Growing Lean and Maple Mean

Allister Graham, chief executive of Oshawa Group, Ltd. BERGSMAN has been feeling very confident about the direction of his company-and …

Allister Graham, chief executive of Oshawa Group, Ltd. BERGSMAN has been feeling very confident about the direction of his company-and with good reason. As Canada‘s largest retail food franchisor and food service company, Oshawa is moving along quite successfully with its effort to “refocus”-a growing strategic trend among corporations, both in the U.S. and abroad.

Refocusing is not exactly a business school concept, but in general parlance it has come to mean concentrating on the core, growth industries of a company and divesting the rest. Refocusing requires a good deal of patience because it generally involves becoming smaller and larger at the same time. It is also often financially tricky because divestiture and acquisition coincide, capital must be raised, but incoming capital has to be distributed. As with any acquisition, the market sometimes reacts negatively or, in other cases, there exists the possibility of being outbid.

The challenge is to find a core business and actualize its growth potential, while shedding ancillary units in a way that does not hurt the company going forward. Contraction is generally easier than expansion, because if there is inherent value in the unit to be divested, specialists can usually find a buyer. In the case of manager buyout, the company has to consider whether it would help fund the acquisition by its managers.

It is most critical, once the process has begun, not to get caught in a deal-making frame of mind and begin buying firms abstractly in the old ITT model; rather you should stick to the goal of finding the acquisitions that fit a narrower definition of what the core company intends to be.

When the C$6 billion Oshawa concluded its future was as a food company, the plan was relatively simple, says Graham. Pharma Plus, the drug store operation, had never amounted to more than 7 percent of Oshawa‘s revenues and was consequently sold. At the same time, its SERCA food service subsidiary bought Neptune Food Services (C$250 million in sales) and Scott National (C$440 million in sales), tripling the size of Oshawa’s food service subsidiary from C$450 million to C$1.3 billion. Today, SERCA is Canada‘s only national food service company.

Oshawa is expected to garner roughly C$6.4 billion in revenue this year, with about 10 percent of sales coming from food service, says Eagle & Partners, a Canadian brokerage company. By fiscal 2000, SERCA should produce 18 percent of Oshawa‘s profits. SERCA’s poised to “produce powerful earnings growth as it exploits acquisition opportunities in a fragmented industry,” reports Eagle.

Oshawa did manage a small profit on the C$100 million sale of Pharma Plus to another Canadian company, Katz Enterprises. More importantly, however, it freed up staff and resources to concentrate on the company’s key businesses. Oshawa‘s refocus was a 12 to 15 month effort-actually a cakewalk compared to UDI, which has finally concluded refocusing efforts that have been going on for two decades.

UDI was founded in 1882 as Dominion Bridge Co., and was proudly involved in many of Canada‘s great infrastructure projects. However, by the 1960s, that business dwindled. UDI moved to the U.S. and in the ’70s, began acquiring manufacturing companies. Eventually, UDI opted to move away from services and focus on manufacturing. Around 1990, the company sold all its service units including its original heartbeat, Dominion Bridge, and began acquisitions.

In June, the company announced three transactions that Chairman and Chief Executive William Holland thought would complete the refocus. It sold the last of three building product units, which amounted to $455 million of the company’s 1996 sales, while announcing its intention to buy IMO Industries and Core Industries, manufacturers of niche industrial and commercial total $770 million.

“The refocus is over because we are now a diversified manufacturer of engineered products,” Holland says. “We are only interested in growing the company around that concept.” Including the most recent deals, UDI stands as a $2 billion company with 10,500 employees. Its products are all in relatively small markets, from $50 billion to $250 billion, but it is the market leader in most of its niches.

Refocusing can be expensive, but neither Oshawa nor UDI are heavily leveraged. Even Holland says his company is now strong financially. However, not everything has gone as expected. While the Core deal was completed, UDI was outbid for IMO. After the Core deal closes, the company will still be about 27 percent leveraged. It will also be generating very significant cash flow.

UDI has moved from 8x or 9x multiples to 13x multiples. TD Securities, a Canadian brokerage, likes the direction the company is taking, noting “UDI took its cyclical, low-margin businesses and replaced them with less cyclical, higher margin businesses with better growth potential.”

Steve Bergsman is a Mesa, AZ-based freelance business writer who has written about corporate finance for reuters, Barron’s, Global Finance and Corporate Finance

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