OfficeMax finally a takeover target

Benj Gallander and Ben Stadelmann
Friday, July 4, 2003

People often ask us how long we are willing to hold a position. Many know that we consider buy-and-hold to be a sucker’s game, a mantra designed to make money for mutual funds and brokers. Over the past few years, an increasing number of parties — having been gored by Nortel and the other techs, to say nothing of the blue chips that gushed red ink — have joined us in our rejection of this axiom.

Sometimes, however, even we will stick around. Take our purchase of National Sea Products (now High Liner Foods) in 1993.

We bought in when the stock was in a free-fall, a gambit we wouldn’t deploy today. Our raison d’être as contrarians is to buy after bad news, but our fingers have been nicked enough times to teach us that falling daggers lead to bloodied palms.

Today, our usual practice is to wait for a stock to rest within a stable range or even enjoy an uptick or two before we lay our money down. This strategy does prevent us from buying at the bottom, but also tends to diminish the risk factor.

High Liner no longer fishes for its supper; instead, it processes and markets seafood and pasta under the High Liner, Fisher Boy, Gina Italian Village and Floresta brands in both Canada and the US Revenues were negatively affected this quarter by the rise of the Canadian dollar, but with stateside club-store sales doubling year over year, and improvements in other aspects of the operation, first-quarter sales were up almost 11 percent this year.

The bottom line responded, with EPS up to 36 cents a share from 32 cents. And market share for High Liner products in Canada remains at a dominating 46 percent.

Two years after our purchase at $5.94 per share, the stock bottomed out at $1.80. The ride back has been slow but tumultuous, although recently investors have pushed the price as high as $9.50, and the stock still trades well below the book value of about $12.50. That latter figure was recently pumped by the sale of the Lunenburg-based fishing and scallop-harvesting businesses and Scotia Trawler shore-based assets for $65 million to a group led by Clearwater Seafoods.

While these divestitures will cut revenues by about $38 million, they ensure that the arrears on the company’s preference shares — more than $6 million — will be paid, while long-term debt will be dramatically reduced. Taken in conjunction with the $17.9 million decrease in debt over the past year, these developments will leave the balance sheet more pristine than at any time in the past decade.

Will High Liner ever reach the $29 plateau it touched in 1991? Arrr, ’tis doubtful, Billy, and our hooks are baited for a sale at a little over a buck higher than the current price. Selling well below book value may not jibe with the image of a couple of value guys, but a decade of riding the choppy seas with these old salts has left us impatient for some shore leave, even if it means the best catches are yet to be landed.