10/21/2013 09:16 EDT | Updated 01/23/2014 06:58 EST

Maple Leaf Foods considers selling its bakery business by early 2014

TORONTO - Maple Leaf Foods (TSX:MFI) has put its bakery business on the auction block as it explores possibilities that would get the most out of its 90 per cent stake in Canada Bread (TSX:CBY).

Chief executive Michael McCain said Monday that while the company hasn't decided the future of the bread operations, a sale is on the shortlist of possibilities.

"We started a process to consider alternatives," he said in an interview.

If a deal materializes, popular brands like Dempster's, Tenderflake, and Olivieri pastas would find themselves in the hands of a new owner.

Maple Leaf has been scouring its operations for cost savings as part of a seven-year restructuring plan that would improve the profits of the overall business, which is primarily focused on meat products.

"The bakery business performance has plateaued — at a high level, but plateaued over the course of the last few years," McCain said.

A decision to court potential buyers comes after Maple Leaf found that revamping its bread operations over the next five years would involve further cost cutting and expansion plans that "require resources, focus and management time and effort," McCain said.

The extra time and effort would be dedicated to reigniting consumer interest in bread and "revitalizing the category," McCain told analysts on a conference call.

The company would also need to reduce expenses in other ways, which would likely include layoffs and other expense reductions.

Those efforts come with "some measure of risk" for the company, he added.

Before Maple Leaf decides its next steps, the company plans to see who else might want to take on the responsibility.

Analyst Bob Gibson at Octagon Capital Corp. said he was surprised by Maple Leaf's decision to weigh a sale of the assets, and he sees potential problems in trying to separate the bread and meat divisions.

"There's too much integration between the two companies," he said. "I don't think it makes sense."

Gibson said the bakery operations have delivered relatively consistent earnings over time, while the pork business "fluctuates all over the place."

"You have a couple of good years and a couple of lousy years," he said.

Meanwhile, shareholders appeared optimistic that a deal would be carved out, with Maple Leaf stock up $1.33, or 10 per cent, to close at $14.63.

This year, the company's stock has risen about 22 per cent on rumours that outsiders could acquire pieces or even the entire company.

Canada Bread shares gained eight per cent, or $4.92, to $66.17. Based on recent stock market prices, Canada Bread had a value of about $1.6 billion prior to the announcement Monday — accounting for more than half of Maple Leaf's overall worth.

The fate of the company is expected to be decided in early 2014, subject to approvals.

Maple Leaf has set up a special committee of directors to ensure that all shareholders are treated fairly, but the company does not guarantee a transaction will be completed.

Canada's largest food processor has been undergoing major changes for several years as part of a $1.3-billion restructuring plan that involved shutting down several plants and selling others.

Maple Leaf closed two bakeries in the Greater Toronto Area and consolidated production at a new bakery in nearby Hamilton, Ont.

Some of those decisions created tensions with its major stakeholders, which first came to light when the Ontario Teachers' Pension Plan, one of its largest shareholders, sold its entire holding after expressing unhappiness over the strategy.

Afterwards, activist shareholder West Face Capital began pushing for a board shakeup amid questions of whether its members were independent enough from McCain family, which owns a controlling stake.

Several changes were made, including the appointment of federal cabinet minister David Emerson as chairman of the board of directors.

Maple Leaf also recently sold its Rothsay rendering business to Darling International, a Texas-based business, and this summer reached an agreement to transfer its commercial turkey farms, hatchery operation and breeding farms to two Ontario-based companies.

Canada Bread, a publicly traded subsidiary, has also been downsizing. It announced in January that it would shut two factories — one in Brad Falls, N.B., and the other Edmonton. The two operations had a total of 121 jobs.