090203 Maple Leaf to Pay $27-Million to Settle Listeria Suits

February 02, 2009

Maple Leaf Foods Inc. Monday reached an agreement to pay as much as $27- million to settle law suits stemming from a listeriosis outbreak that killed more than 20 people last year, successfully resolving one of the most difficult chapters in the processed meat company's 80-year history.

Under the settlement, which must be approved by judges in Saskatchewan, Ontario and Quebec, people who became sick after eating tainted products would receive as much as $125,000, while spouses and other family members could also be eligible for compensation.

Being at the centre of a food poisoning outbreak is a nightmare scenario for any food products company, but the good news is that this one could have been a lot worse for shareholders who have surprisingly found themselves holding one of the best investments on the Toronto Stock Exchange since the beginning of September.

Shortly after the outbreak was reported, Maple Leaf launched a public campaign, including a television commercial less than a week into the crisis in which Maple Leaf chief executive Michael McCain appealed to consumers and explained the situation, a move that potentiality saved some lives.

In the following weeks the company instituted the largest meat recall in Canadian history.

"They did a fantastic job of handling this thing and explaining themselves," said Octagon Capital analyst Robert Gibson. "They accepted blame for the problem and they recalled all the meat to fix it. They were very proactive. The [legal] settlement - that could have dragged on for years but it came very quickly."

Shares in the Toronto-based company yesterday closed at $10.74, around the same level they were trading before the crisis began back in August. News of the outbreak sent the shares tumbling to less than $8 on Aug. 26, and they slumped even lower in October amid ongoing concern about fallout from the disaster and renewed turmoil from the credit crisis.

But from the beginning of September, roughly the beginning of the market crash, Maple Leaf shares are up an astounding 22%. While in many cases investors would still be focusing on the fallout from an ugly scandal, the market has moved on to the company's attributes as a near recession-proof food company.

"In terms of communication response to crisis they have established the gold standard," said Terry Flynn, a professor at McMaster University's DeGroote School of Business. "It doesn't alleviate the fact that people died but it speaks to the character and values of the organization that in the face of their own mistake they chose to address it head-on rather than run away."

The outbeak, which affected more than 5,000 people across the country, according to lawyers, was traced to a single Maple Leaf plant in Toronto.

Founded in 1927, Maple Leaf emerged early as a major player in the meat products industry, and today has operations across Canada and the U.K. The company also has a major agribusiness division with holdings in hog and poultry farms.

Food poisoning has always been a major concern in the food industry and outbreaks occur somewhere in North America almost monthly. "It's very common," said Mr. Gibson.

Still, every time it happens consumer confidence is impacted and that can have a long-term effect in terms of lower product sales. According to Mr. Gibson, consumer appetites for some Maple Leaf products declined significantly. The question now is whether sales will return to their earlier levels. They have not yet done that but given the bounce in the share price, investors are betting it will happen soon.