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Consolidation alters landscape for seafood

Ocean Beauty was an acquisition target, but a deal
    with Trident Seafoods fell through in May - Photo by James Wright
By James Wright
September 01, 2006

Take a spin through the 2006 issues of SeaFood Business and you'll notice a trend: Since the year began, SFB has reported on more than 20 mergers, acquisitions or strategic alliances involving some of the biggest names in the business.

You'll also read about a failed deal that would have been one of the biggest mergers in the industry's history, one that would have created a company generating nearly $1.5 billion in annual sales. It also could have indelibly changed seafood-sourcing dynamics in the Pacific Northwest and beyond ( SFB May '06, p. 1 and June '06, p.1).

Consolidation throughout the food industry is not a new phenomenon. In 1998, 10 of the nation's largest supermarket chains were reorganized with more than $41 billion in transactions.

As a result, retailers took a hard look at their purchasing, with some scaling back their seafood departments' variety and square footage. More recently, consolidation shook the foundations of the farmed-salmon industry.

The road ahead will likely be filled with more maneuvering by seafood suppliers; that pool may soon shrink to a select few for any given species, whether wild or farm-raised. How the buyer-seller dynamic evolves is what everyone will be watching. Further consolidation in the seafood-supply chain seems inevitable, considering the merger activity in the food industry as a whole.

According to The Food Institute of Elmwood Park, N.J., 323 mergers and acquisitions closed in 2005 in a category that 
includes food processors, retailers, restaurants, packaging and equipment suppliers, investment firms and banks, with another 75 announced deals that had not closed by year's end.

That total was actually down from a frenzied 2000, when 637 such agreements were finalized.

"Activity may have declined compared to previous years, but there were a number of significant transactions," says Danielle Breuel, research and education director at TFI, which has tracked food-industry merger and acquisition activity for 25 years.

Atop that list were the sale of Albertson's to a consortium of investors including Supervalu, and the bankruptcy of Winn-Dixie that led to its fire sale of more than 100 units, says Breuel.

Why are so many big fish gobbling up their competitors? For one, an acquisition or merger is often a low-risk move that can kindle growth and enhance the bottom line.

"Examination of certain deals illustrates the use of acquisitions to strengthen current operations or to enter new areas of business," notes Breuel.

"Meanwhile, divestitures enable firms to exit underperforming areas."

W hat's more, a diversified supplier can offer unmatched product lines and services while also ensuring access to increasingly finite supplies. As seafood consumption increases in the United States and abroad, the competition for market share and marine resources - as well as farm-raised species - will intensify. In most cases, the bigger fish rule the pond.

For example, supply-side consolidation has begun in Alaska, where the crab fisheries were rationalized in 2005. The introduction of sellable fishing and processing quotas led to the sale of several companies that held desirable shares. Since sourcing seafood is now played out in a global arena, some companies became commodities, swept up by large overseas corporations. But what's still uncertain is if consolidation has actually benefited a fragmented seafood industry.

"It makes sense from the standpoint of companies wanting to offer a broader array of products with the deepest integration of services possible," says Matt Fass, VP of Maritime Products International, a seafood importer in Newport News, Va.

"However, those who try to become integrated may miss out on quick developments in other areas, like aquaculture. Things may not work out quite as some envision, which may lead to a pullback."

"There's got to be strategic reasons for it," says Richard Mullins, senior marketing manager at Orca Bay Seafoods in Renton, Wash., which markets a variety of wild-caught species. "The huge story will be access to resources in the next 10 to 15 years. [In Alaska], there's only a handful of big players right now."

A real beauty

Few players are bigger today than Trident Seafoods, with an estimated $800 million in sales in 2005, ranking third among North American seafood suppliers. The industry was buzzing when, on March 27, Trident announced its bid to acquire Ocean Beauty Seafoods' processing operations and merge the two Seattle rivals' smoked-fish and distribution businesses. The potential gain was big: Ocean Beauty's 2005 sales were $500 million, a nice catch for Trident founder and CEO Chuck Bundrant.

The arrangement would have spawned a salmon- and pollock-buying mega-firm that could have tightened its pricing controls on Alaska's seafood bounty. Tri­dent already operates 25 fishing vessels and at-sea processors and 18 processing plants throughout the Pacific Northwest. (Trident recently announced it is restructuring operations with several staff hires and promotions, see Late News, page 4). Adding Ocean Beauty's nine distribution facilities and eight processing plants in Alaska and Seattle would have been a major move indeed.

But it didn't happen. On May 3, Bundrant said the deal was off and offered little insight as to why.

"We simply were not able to reach an agreement on this transaction," he said at the time.

While the real reason it fell through is hotly speculated, some say the merger would have been a boon to Alaska's seafood industry.

"It also would have given an advantage to consumers," says Clem Tillion, a semi-retired fisheries-management veteran of Halibut Cove, Alaska. He believes only an entity of large proportions could effectively market Alaska seafood as a whole.

"That kind of consolidation doesn't hurt anything, it still [puts product] on the open market on a daily basis. If you pay enough, you can still get it. You have to have a competitive system," Tillion adds.

"I've always had one guiding principle in fisheries management, and that's getting quality product to the consumer at an affordable price. Con­solidations that allow you to provide a better product throughout the year are good for the consumer."

A number of companies on the annual SeaFood Business Top 25 Seafood Suppliers list have grown through consolidation. Nippon Suisan USA of Redmond, Wash., a part of Nissui of Tokyo, owns UniSea and Gorton's of Gloucester and recently bought frozen-seafood importer and distributor F.W. Bryce, also of Gloucester, Mass. Nip­pon also took on King & Price Seafood Corp. last year, adding $130 million in sales to its portfolio. Further, the Bumble Bee-Connors Bros. merger of 2004 created North America's largest branded seafood company.

Just three days after Trident announced its bid to acquire Ocean Beauty, it closed on a deal with ConAgra Foods of Omaha, Neb., for the Louis Kemp brand of retail surimi products. The sale was part of Con­Agra's attempt to further shed its struggling seafood, refrigerated meats and cheese businesses. Seafood was clearly outside ConAgra's core product categories; conversely, adding Louis Kemp and its Motley, Minn., plant augmented Trident's production of its SeaLegs® brand of surimi, the bulk of which is sold to foodservice operations.

Trident spokesman John van Amer­ongen says acquiring Louis Kemp and its market recognition gives Trident access to the U.S. retail market for surimi, comprising 170 million pounds annually.

"We'd like a bigger share of that market, and it takes a big plant and good people to fill that demand," van Amerongen said via e-mail.

At the time of the sale, however, the Louis Kemp ship was taking on water. Sales of its Crab Delights® had fallen 24 percent in the 52-week period through Feb. 19, to $19.3 million. Sales of Lobster Delights® and Scallop Delights® were also tumbling. Trident is confident of a turnaround, however.

The Louis Kemp saga is illustrative of the current marketing culture, where the name on the bag is as much of a sellable product as its contents. Since its inception in 1985, the brand has been owned by five separate entities yet has managed to remain one of the most trusted names in retail for analog-seafood products. Whatever company has owned Louis Kemp, it's Louis Kemp that's been at the top of the product category.

James Dettore, president and CEO of The Brand Institute of Miami, which conducts branding and marketing research for large corporations, says Louis Kemp's success is precisely what made it an attractive acquisition.

"We see it time and again with top brands. A lot of seconds and thirds will buy No. 1 to become No. 1," Dettore says. "If the investment is good and the brand is No. 1, it's a lot easier decision than buying the No. 10 brand. There are a lot of upsides to being on top. It makes sense if it's the right time to sell, and it was the right time [for ConAgra]."

Some win, some lose

The big fish eat the little ones. The axiom about life under the sea also applies to the industry that depends on the oceans' creatures as its commodities. And the companies that are closest to the resource have a strategic advantage.

Just ask Dave Keene, who has been in the crab business since 1977. Last year, Keene and his partners sold Royal Aleutian Seafoods to a group headed by UniSea. Keene says the sale might not have happened if Sen. Ted Stevens hadn't rationalized Alaska's king and snow crab fisheries.

"The biggest raison d'etre [for rationalization] was to prevent over-capitalization on both sides," Keene says. "There was too much gear chasing too little fish, too much gear processing too little fish. It created a dangerous operating environment."

Under the old derby-style system, harvesting crab was a race rife with risk: boat versus boat, processor versus processor and everybody versus Mother Nature. With typically just three and a half days to fish, often in inhospitable conditions in the Bering Sea, there were winners and losers.

"And with a derby, all you could do was ram the max amount of pounds through your plant each day, 24 hours a day," Keene adds. "The biggest downside, though, was that the type of product was one-dimensional. No added value, just bulk packs that need further processing."

Alaska's crab fisheries now operate in a somewhat controversial two-pie system intended to benefit both harvesters and processors. Both receive quotas that can be sold, which ultimately eliminated many small boats from the fishery. And since Royal Aleutian at the time had some of the largest quotas in the state, especially for brown crab, the Dutch Harbor processor was ripe for the picking.

"Our crab quotas were very attractive to larger companies - the Jap­anese companies, Peter Pan, UniSea, etc.," Keene says. "Pollock sustains them, and crab is a small blip on their radar, but from their standpoint, after rationalization was introduced, and given the size of our quotas, we became an acquisition target."

The face of Alaska's crab industry changed; whereas 10 years ago there were upwards of 20 major crab processors in Alaska, today there are just six, four of them owned by large Japanese corporations: Alyeska Seafoods and Westward Seafoods of Seattle, both owned by Maruha Group; Peter Pan of Seattle, owned by Nichiro Corp.; and UniSea. Rationalization shrank the pool of suppliers, but Keene notes that it also improved product quality and increased safety in one of the world's deadliest professions.

Of course, not everyone is happy with the new system.

"Do I think the crab fishermen got screwed? Yes," says Tillion. "I also think it was bad for the crab-consuming public. Exclusive rights are detrimental to the consumer."

But Keene, who now owns WOW! Crab Co. in Seattle, says consolidation has obvious benefits for both the buyer and the seller.

"By consolidating, [UniSea's] fixed costs went down, and they go from a middle-of-the-road crab player to the largest one in Alaska right now, with pricing power and other advantages."

On the farm

Farm-raised species pose another set of concerns when it comes to consolidation. Harvesting quotas and price negotiations with fishermen make way for pond-acreage output, disease control and feed costs, for example. Major moves have been made recently in the tilapia and Atlantic salmon markets, proving that size does matter.

Take Pan Fish. The Norwegian salmon producer, along with many of Norway's seafood companies, fell on hard times a few years ago, posting losses of $360 million, and its stock value fell 98 percent. But those days appear to be over, thanks to the power of consolidation and an extremely wealthy entrepreneur named John Fredriksen, a Norwegian shipping magnate.

This March, Pan Fish, with 2005 sales of $300 million, took a big step forward by purchasing rival Marine Harvest for $1.6 billion from Nutreco and Stolt-Nielsen, forming the world's largest aquaculture company. Pan Fish now expects to produce 346,000 metric tons, roughly one-fifth of global farmed-salmon production.

How did Fredriksen, who holds a 47.3 percent stake in Pan Fish, manage to buy Marine Harvest, which posted sales of $1.3 billion? By trading up: As part of the transaction, he sold his 25.7 percent stake in Fjord Seafood, the world' s fourth-biggest salmon-farming company. And Geveran Trad­ing, indirectly controlled by Fred­riksen, had just acquired Marine Har­­vest from Nutreco and Stolt-Nielsen.

Other big moves may loom for the farmed-salmon industry, but which others may see a shuffling of suppliers? Look to sources of strength, like tilapia (U.S. consumption is expected to top 500 million pounds this year).

At the International Boston Seafood Show in March, Miami-based producers Enaca USA (RioMar Tilapia) and Mountain Stream Tilapia announced an alliance of their Central and South American farming operations, forming a new company, Aqua­mericas. The companies gained an estimated 25 percent share of the U.S. market for fresh tilapia fillets. Accor­ding to Roger Duarte-Rodriguez, Aqua­mericas' managing director, the move paid dividends.

"The merger has allowed us to gain efficiencies in distribution and logistics, and the increased supply has given us much more flexibility in meeting our customers needs," says Duarte-Rodriguez. As for future consolidation in the global tilapia market, "anything can happen," he says. "It is a very competitive environment, especially in light of the growing imports of frozen fillets from China."

Why consolidate? Supply, selection, service and the bottom line can all improve. But for many seafood buyers, it's still all about trust. So, when Tampa Maid Foods acquired Cox's Wholesale Seafood of Tampa, Fla., this May, it was noteworthy that Cox's 80 employees kept their jobs. As it turns out, Cox's kept its customers too.

"You build relationships [with vendors], especially with seafood," says Denise Englade, seafood buyer for the seven-unit Central Markets of Dallas, owned by HEB.

Englade buys pink shrimp from Cox's and was happy to see that, despite the merger, it would be business as usual. If not, "it would have been like starting over," she says.

Today, as sourcing seafood goes global, only the largest may be allowed to play. Therefore, further consolidation can be expected.

"Consolidation is the name of the game," says Tillion.

"I'm not worried about who in the industry takes the hit," he says. "Look at each merger or acquisition and ask, 'Will this create a better airline? Cheaper bread? Better fish?' If it benefits the consumer, then I'm all for it."

Assistant Editor James Wright can be e-mailed at jwright@divcom.com

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