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« February 2008 Table of Contents

Processing & Services: Financial services

Mergers and acquisitions fuel industry consolidation

Mergers and acquisitions in North America's seafood sector have taken a back seat to those in Europe in recent years, but that's set to change in the future, according to Matt Hill, director of Seattle-based KeyBanc Capital Markets, a division of KeyCorp, which provides commercial banking and investment banking services to middle-market companies.

"There's a lot more discussion that's been going on in the last five to seven years about 
merger and acquisition activity, with a lot of players considering acquisitions," he says. "Based on the work we've done and the conversations we've had in the industry, we'll see a lot more going forward."

The seafood industry constitutes two thirds of business in the northwest for KeyBanc Capital Markets. The anticipated increase in consolidation is occurring at a time when many owners of seafood companies are at a generational stage, 
Hill explains.

"People are at a point in their ownership where they're looking for liquidity or transition to the next generation," he says.

"Many of these owners are at an age where they're thinking about retirement and succession. That, coupled with a banking environment where it's easier to leverage up these seafood companies now than it's been in the past, means there will be more merger and acquisition activity going forward."

Thanks to the increasing demand and diminishing worldwide supply of seafood, the basic economics of the industry are more positive than ever. As a result, the industry's consolidation activity has been on the rise in the past few years, says Kristjan Davidsson, a spokesperson for Glitnir.

"There have been a number of mergers and acquisitions in recent years and we see the trend accelerating, in particular, vertical integration," he says. "A few recent transactions in the Americas include Icicle and F.W. Bryce in USA, FPI in Canada and Copenica in Peru."

Choosing an advisor

For a seafood company considering consolidation, it is critical they hire an advisor who is knowledgeable in the industry as opposed to a generalist, says Hill. "There are so many nuances specific to the industry, and the buyers of these types of companies have expanded," he explains.

"Equity funds have taken a larger interest in the seafood industry, so you have to focus on those funds and on strategic buyers. We'd advise anyone considering a sale or recapitalization of their company to hire an advisor with specific knowledge."

There's one question company owners should ask themselves before choosing their advisor, says Davidsson: "How important is it to know and understand what you are doing?"

"Our understanding of the operations and the risks of the industry, and our extensive global network in the seafood industry and in the financial markets are reasons people often mention for contacting us," he says.

Private equity

When Poseidon Enterprises was looking to sell a stake of its company to a private equity firm last year, the Charlotte, N.C.-based seafood processor and distributor hired a boutique investment banking company in its home city, who assembled a book outlining the company.

"They took that book to a group of private equity firms and we were contacted by about 30," says Rich LaVecchia, CEO.

LaVecchia and his team eventually chose to sell a majority interest of Poseidon Enterprises to Hunt Private Equity in Dallas, which is part of the Hunt Group of Companies.

It was the first foray into 
seafood for Hunt Private Equity, but LaVecchia was not worried about the partnership.

"Hunt buys and sells businesses for a living," he explains. "They're our partners in the business of growing companies, and they provide not just capital but market knowledge, business expertise and legal advice."

Since the partnership with Hunt Private Equity, Poseidon Enterprises purchased Low Country Lobsters in Charleston, and aims to make more acquisitions to bring its annual revenue from its present $95 million to $250 million in the next four to six years.

"Since that initial transaction we've had 20 companies approach us to find out if we're interested in acquiring them," La Vecchia says. "Some are a good fit, some are not. There's definitely a logic to what we do."

That logic is an imperative part of acquisitions, he cautions. "Don't make an acquisition for the sake of making one. There have to be strategic reasons or significant cost savings or efficiencies you can derive from it." Likewise, when searching for a private equity firm, it is essential to ensure in advance of the partnership that you share the same goals, he advises.

Where's the money?

Owners of privately owned seafood businesses looking to finance growth have a variety of options. They can approach their bank for an increased 
line of credit, or opt for an increase of the share capital. "The bank can provide valuable assistance in that work," says Glit-
nir's Davidsson.

"One can search for trade investors that typically bring more than just the money. They can help with knowledge, connections, networking and collaboration," he explains. "One can alternatively look for financial investors, or go public on the stock market. In all these transactions, Glitnir can provide assistance."

Before you acquire

Prior to making an acquisition, it is essential to examine the entire value chain, defining your place, goals and vision within it, cautions Davidsson. "It's important to understand the dynamics of your segment and the industry," he continues.

"If you are looking to an investment in a resource, you have to look at the long-term prospects such as sustainability issues, how it is managed and its future outlook. Often you are looking at complex issues that can be highly costly to omit or underestimate, including legal issues, due diligence issues, structuring and 
financing," he explains.

"A bank with an international network can provide valuable assistance in most steps of this process: the scanning, negotiations, execution of the transaction as well as structuring and arranging of the financing."

Generalist hazards

Hill agrees. "The problem with hiring a generalist is that they are learning the industry as they go, and wasting a lot of time trying to understand the motivations of the parties trying to come together in a merger or acquisition," he says.

"If we're financing a transaction, we have a better knowledge of the industry and better visibility of the risks. And on the advisory side, we're very active in this space, which means we understand what various parties are trying to achieve, and as a result, we can make the process smoother."

Most seafood companies want to deal with a banker who has experience in the industry, asserts Tim Antilla, VP with Wells Fargo's commercial banking division.

"That's because the industry is cyclical, and is subject to lots of regulations and unusual aspects derived from a resource that is hunted. You don't find many industries with those kinds of 
characteristics," he says.

Still, the further you get from the harvesting aspect of the industry, the less important it becomes to have a grounding in some of the unique aspects of regulations management.

"A seafood distribution company has many of the same characteristics as other wholesalers and distributors. But someone who is a salmon processor in Alaska is a pretty unique animal," says Antilla.

Understanding collateral

There are few transactions that occur in the seafood sector without collateral. Often, in the context of leverage finance in support of a consolidation, all the assets of the seafood company, most importantly its fishing rights, are viewed as an important asset and taken as collateral in support of a transaction, says Hill.

What is taken as collateral depends on how the loan is structured, says Scott Etzel, VP of the agricultural industries group at Wells Fargo. "For long-term loans collateral can be land, equipment or a building, while for shorter-term loans, inventory and accounts receivable may constitute collateral," he says.

Patience is pivotal

The pace of consolidation in the seafood industry over the next five years will depend largely on what's going on in the financial markets, says Antilla. "Over the last two years it's been easier to do transactions that made sense on a financial rather than a strategic basis because of low interest rates," he explains. "With a lot of liquidity in the market people were able to raise money to acquire companies. But given the recent financial turmoil and the increase in risk premiums, I think the financially driven acquisition activity may be harder to do."

Still, strategic acquisitions will continue to take place while balance sheets are healthy and the industry as a whole is profitable, he predicts. "Patience is going to be an important characteristic of success going forward, waiting for the right opportunities at the right price."

Contributing Editor Lauren Kramer lives in British Columbia