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DEALTALK-Rising demand puts Canada's organics on M&A menu

* Organics output growth outpacing broader foods market

* United Natural Foods, Whole Foods Market likely buyers

* SunOpta, SunRype, Lassonde on their radar (For more Reuters DEALTALKs, click [DEALTALK/])

Arnika Thakur and Gowri Jayakumar

BANGALORE, Sept 17 (Reuters) - It’s a vast country with a cool climate that reduces pest problems, but Canada still imports more than 75 percent of its organic food -- making it ripe for deals as large food groups look to tap growing organics demand.

Mainstream North American food firms such as United Natural Foods Inc UNFI.O and Whole Foods Market WFMI.O are eyeing a broad range of organic products to help them stand out in a growing retail crowd.

Potential targets include natural food and drink makers SunOpta SOY.TO, SunRype SRF.TO and Industries Lassonde LASa.TO, analysts say, with some decent premiums likely.

“Canada is still underpenetrated in terms of the potential for natural and organic sales, especially relative to Europe,” said Peter Prattas, an analyst at Fraser Mackenzie.

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For FACTBOX on organics deals; [ID:nSGE68E0JK]

For StarMine valuation data; r.reuters.com/par34p

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Growth in organic production was becalmed during the post-financial crisis downturn, but has since picked up and is running at 5-10 percent a year, outpacing the broader food industry’s modest 1 percent growth.

Analysts say that trend is sustainable as niche organic products -- grown without using conventional pesticides or genetically altered organisms -- hit Canada’s retail space, with food companies looking to offer something their rivals don’t.

The U.S. natural products market, which also includes bodycare and supplements, is worth some $85 billion, with natural and organic foods accounting for close to a third of that.

According to data from industry consultant Danny Wells and Associates used in a SunOpta slide presentation, organic and natural foods made up only 8 percent of the total grocery market in 2009.

SOME JUICY DEALS?

Brampton, Ontario-based SunOpta, valued at more than $380 million, has been stripping down since June to focus on its profitable organic foods business, and could prove attractive with its 7-10 percent growth rate. [ID:nSGE6800IM]

“SunOpta could command a deal value of at least 10 times its EBITDA which, right now, would be about $500 million,” said Chris Krueger, an analyst with Northland Securities.

The company specializes in organically producing and processing soy, wheat, grains and fruits, which are used by food giants including General Mills GIS.N, Kraft Foods KFT.N, Kellogg K.N and Cargill.

In July, soft drink maker Cott Corp BCB.TOCOT.N agreed to buy natural juice firm Cliffstar for $569 million, [ID:nN08210569]and analysts reckon fruit-based drinks makers Lassonde and SunRype could be next under the takeover spotlight.

“Cott is an example where they went from soft drinks and sugar-based beverages to more healthy, organic juices,” said Leon Aghazarian, an analyst with Industrial Alliance Securities.

He said Lassonde could fetch 6-7 times its EBITDA -- which may imply a deal worth around $460 million.

“Everybody’s racing to be first in line to bring the newest product to the market,” Aghazarian said.

With increasing health and dietary concerns likely to keep the organics market growing, analysts reckon there will always be companies on the look-out for pure play organic food producers.

"It could be somebody like Nestle NESN.VX or Kraft, but the list is long ...," said Prattas at Fraser Mackenzie. (Reporting by Gowri Jayakumar and Arnika Thakur in Bangalore, Editing by Ian Geoghegan)

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