Chile salmon sales consolidation could lead to more mergers in future

There will be more consolidation on the sales side amongst Chilean salmon farmers in 2017, which could lead to more mergers in the future, according to a top industry dealmaker.

“The Chilean export industry has been relatively fragmented on the sales side; this has been an issue for years. Now, they have got their heads above the water and they can start to do those kinds of ventures,” Kolbjorn Giskeodegard, the seafood director at Nordea Bank’s equity research unit, told Undercurrent News.

This should develop further, however.

“We think that the consolidation the downstream Chilean salmon producers are undertaking is the beginning of the process that will result in fewer players on the production front as well,” Ignacio Kleiman, managing partner at seafood-focused investment firm Antarctica Advisors, told Undercurrent.

Consolidating on the sales side is “a temporary band-aid, not a permanent solution”, he said. “They are testing the waters and learning to work with partners. Real mergers will need to happen.”

As long as salmon prices stay high, allowing asset values to recover, Kleiman said “fully-fledged mergers” will happen over the next couple of years.

“Mergers of small to middle sized players among themselves will likely to be the first steps. The larger players have plenty of excess concession capacity in their portfolios,” he told Undercurrent.

The consolidation on the ownership side will likely be driven by the industry itself, with the possibility of “supplemental capital” coming from the private equity community, he said.

The consolidation on the sales side is already ramping up. New World Currents, a sales joint venture for China between four farmers — Australis Seafoods, Cultivos Yadran, Pesquera Camanchaca and Blumar — is looking to add volumes from others.

Australis, which opened a US sales office last year, is hoping to sell additional companies’ volumes in the future. Also, Blumar and Productos del Mar Ventisqueros now have a joint venture for sale into the US market. Cultivos Yadran and Marine Farm Tornagaleone, two family-owned salmon farmers, also have a US sales JV, called Patagonia SeaFarms.

Gorjan Nikolik, senior analyst with Rabobank International, told Undercurrent he definitely thinks sales consolidation is likely for Chilean firms in 2017.

“The Chilean sector likes to position itself as a peer to Norwegian salmon, and it doesn’t like that it sells at a discount,” he said. “There are markets like the US and China where cooperation and sales efforts would really benefit.”

A Chilean sector veteran said, however, that he does not expect much beyond more sales consolidation in the near future.

“I don’t see much ownership consolidation at this point,” Eduardo Goycoolea, executive director of New World Currents told Undercurrent at the recent China Fisheries & Seafood Expo in Qingdao, China.

“Several of the companies are working on sales together in the US, and then we have New World Currents in China,” he said.

More generally, next year will be for the industry to make some money, he said. “Production is down, but healthier. Prices are good; markets have recovered and are letting us have some profits,” Goycoolea also said.

Analysts in Norway echoed Goycoolea.

“I don’t see a lot of M&A there [in Chile],” said Tore Tonseth, an equity analyst with SpareBank 1 Markets, told Undercurrent.

The problem, he said, is the different views of buyers and sellers.

“Most companies have not been making money until now, so sellers will say now they’re in profit, and a strong market, justifies a higher price – but buyers will say they’ve only just started making money, they’re unpredictable. The views are too different,” he said. “It’ll be hard to agree deals.”

The increase in profits from Chile has meant there are not players looking to sell, as was the case last year, said Nordea’s Giskeodegard.

“Those who have been looking for cheap assets [in the Chilean salmon industry] are too late. When you go from losing $1.5-$2 a kg, as was a year ago, to making the same amount in profit, it is an extreme turnaround. That is also reflected on the valuations, you will not get cheap assets in Chile now, as the potential cash flow is so much better. So, the possible market value is so high now,” Giskeodegard told Undercurrent.

“Back one-two years, the net debt in the company was, to some extent, much higher than the market value. Now, it is the other way around. The debt is going down from cash flow and the market value is increasing. One year ago, the industry had to consolidate. Now the old owners do not want to give up and give the company away now, for a small sum of money,” Giskeodegard said.

There is still a need for more mergers, however.

“If Chile remains stable, M&A is much more needed there [than Norway]. Lots of small sites spread around – it could do with a move to being more like Norway, fewer sites in areas, run by one company,” said Tonseth.

Another factor that will hinder M&A in Chile has been the new regulation that limits production depending on the sanitary situation of salmon farmers.

According to Knut Erik Lovstrad, of Beringer Finance, the changing regulatory environment in Chile is more of a focus than M&A, which he said he is “unsure” will happen, in the short term.

“The feature in Chile now are the new regulations – they may well require investment by farmers to meet new standards. Some companies will need new cages, feed technology, a generally higher biological standard. Maybe even new farming sites. We’ll see how willing to invest Chilean companies are,” he told Undercurrent.

If farmers are not willing to invest, however, this could cause some deals.

“They are at least making profit at the moment, so they have the funds. Or perhaps they’ll prefer to sell out,” he said.

Expansion intent

There is, it seems, some growing intent for deal making and expansion starting in Chile.
For example, Salmones Magallanes plans to increase its salmon production by almost double in the next five years.

Recently, Cooke Aquaculture’s Chilean arm, Salmones Cupquelan, came out on top in the sale process of Marine Harvest’s processing plant in Tepual. Cooke’s Nell Halse said the company plans to continue to invest in Chile.

Meanwhile, Chile’s third largest salmon exporter, Agrosuper, said it is evaluating acquisitions outside of Chile as high salmon prices drive profits to deepen its global presence.

Also, Japanese trading giant Mitsubishi Corporation is merging its two salmon arms in Chile, Cermaq Group and Salmones Humboldt. Mitsui, another Japanese trading house, has also invested in farmer and processor Multiexport Foods.

Despite all the talk of the need for consolidation in Chile and the deals that have taken place, several have fallen through in the past few years.

In October last year, Granja Marina and Ventisqueros called off merger talks. Earlier in the year, Marine Harvest and Empresas AquaChile also called off a deal.

This would have combined the Norwegian company’s Chilean assets with AquaChile and created the largest farmer by far.