Saputo to exit Europe with plans to close plants in U.K. and Germany

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The corporate logo for Saputo is shown. THE CANADIAN PRESS/HO

MONTREAL - Saputo's nearly seven-year European venture is coming to an end after the Canadian cheese giant announced plans Monday to close cheese processing plants in Wales and Germany.

The Montreal-based food company entered the European market in 2006 with the acquisition of Spezialit�ten-K�serei De Lucia GmbH, a German cheese manufacturer producing Italian cheese specialties such as mozzarella, ricotta and mascarpone.

A year later it paid $12 million for Dansco Dairy Products Ltd., a United Kingdom manufacturer producing mainly mozzarella for the food service market segment.

Despite adding equipment to make the plants more efficient, Saputo said it found it couldn't compete against companies that have been in operation for generations with entrenched brands favoured by consumers.

"We gave it our best effort. We applied as much of our knowledge and technology to these two assets that we can but despite our best efforts, we didn't see light at the end of the tunnel," CEO Lino Saputo Jr. said in an interview.

He said the company deliberately entered Europe in a small way to better understand how the market operated, much like it did in the late 1980s in the United States before acquiring Stella, a company more than twice its size.

In Europe, it found a quota system that is very different from anywhere else in the world it operates including Canada's managed structure or the American free market system.

"We did not have scale, we did not have size and we did not have, quite frankly, brands that would be able to carry the day," Saputo added.

A total of 140 employees will be affected if Saputo gets approvals for both closures.

The company (TSX:SAP) is required under U.K. law to hold 30 days of consultation before it can close the plant in Wales after 90 days.

The Welsh plant, which makes mozzarella cheese for the food services industry, was acquired in 2007.

The German plant, which makes specialty cheeses for the retail market, was acquired in 2006.

Saputo said the company didn't seek buyers but is open to entertaining interested parties before shuttering the operations.

Closing the plants would cost $15 million after taxes, comprised of a $15 million writedown and $7 million of cash costs offset by a tax recovery from the loss on the investment.

The closure would save $1.5 million in annual pre-tax operating losses, a very small amount for Saputo, which earned $831 million on $6.9 billion of sales last year.

"It is still a tough decision for us to take even though it is a small asset," Saputo added.

Irene Nattel of RBC Capital Markets said Saputo determined that it was challenging for processors to compete in the European market, even though it may be large, and that better opportunities exist elsewhere.

"With subsequent acquisitions and investments in the U.S. and Argentina, and potential for continuing acquisitions notably in the U.S., in our view the decision to exit Europe makes a lot of sense," she wrote in a report.

Saputo said he hasn't permanently closed the door on Europe but growth opportunities will likely come first in the United States, Latin America and entering Oceania either in New Zealand or Australia.

"It's not that we'll never be in Europe but it would have to be a really compelling argument for us to have to consider an acquisition in Europe. If we do have a file that would allow us to buy something that is bigger and stronger in Europe, at least we know what to look for."

Saputo is Canada's largest dairy processor and the 12th biggest in the world. It also produces several brands of snack cakes.

On the Toronto Stock Exchange, company shares gained 64 cents at $50.09 in Monday afternoon trading.