Undercurrent News – August 22, 2018
North American companies need to be more aggressively seeking access to raw material resources overseas, believes Birgir Brynjolfsson of Antarctica Advisors.
Speaking to Undercurrent News, Brynjolfsson – who worked as the exclusive advisor to Mitsui & Co on its March 2018 deal for Mark Foods – noted there is a perception that US companies in the seafood sector are interested in looking overseas for expansion.
“But what we’ve seen is that there are so many opportunities within North America that there is no need for the companies to start looking overseas.”
“We get a lot of inbound communications from advisors in Asia and Latin America asking ‘hey, we’ve got this opportunity, are you guys interested?’ And our recommendation is that the North American companies have not been aggressively going abroad acquiring the right resources.”
This, he believes, is not the right attitude, as the vast majority of US seafood consumption is imported. Suppliers should be looking to secure access to resources, “driving this critical integration – while they are not”.
He did concede that their US-focused approach has driven consolidation domestically; a good thing for the sector and consumers. But he warned, “if you don’t secure access to the resource, then the resource will become more expensive, and that’s not going to be good for the companies and the consumers”.
He called Red Chamber Group-owned US importer Aqua Star’s 2018 investment in Indian shrimp processor Sagar Grandhi Exports a “great move”, adding the US needs more moves like this one.
“It was a great move for a US company, with the market access going to acquire or invest in the resource. It’s excellent. I would like to see more US companies go overseas to acquire the resources to secure access to them.”
More investments from US shrimp importers are expected in Indian processors and farmers, sources said. “At least” one other US importer is looking at a similar investment in India, said one source with a packer there.
It makes sense for US importers to invest in shrimp producing countries such as India, both due to market requirements and also the application of the seafood import monitoring program (SIMP) for shrimp in nine months, sources suggested.
Investing in countries like India “makes sense now, especially with SIMP”, which will mean importers must comply with the National Marine Fisheries Service’s (NMFS) new record keeping rules, said Kevin Tang, CEO of Sunnyvale Seafood, the US operation of China’s Zhanjiang Guolian Aquatic Products.
In March 2018 Brynjolfsson told Undercurrent global groups were realizing acquiring or investing in US distributors was the fastest way to get access to the market. Now, he has noted the “whole US value chain has continued to consolidate” in 2018.
“What we’re seeing here in the US is that the big retailers are starting to look to do business with bigger players that can ensure constant supply and traceability, and I think that the industry is going to have to adapt to that,” he said.
Retailers will not find it easy to simply cut distributors out of the chain, he said, as said distributors have “built a lifetime’s worth of supplier relationships”.
“Even if your name is Walmart, or Costco, or Publix, you don’t just build those relationships, and that quality supply chain, that easily. So I doubt that the big retailers will easily cut them out, but I think that they will start working with bigger importers and distributors more closely.”
The key US distributors – and this is likely the case in other countries, Brynjolfsson added – make themselves vital to customers through both relationships and diversity of product.
“Sure, shrimp and salmon may be a big part of what they’re supplying, but there’s a whole range of other species that they’re supplying. I don’t think that the big retailers are going to start going to New Zealand to buy mussels. This isn’t going to be a trend where the distributors are going to be cut out.”
Those that will be successful are those with scale, a diversified product offering, and a diversified supply chain of raw materials, he said. The challenge, on the other hand, will be for the “single species, small-scale businesses”.
On this front, the US remains a sector ripe for consolidation, he said.
“[It] is getting old, there’s so many grey hairs in the industry, and not everybody has thought about succession planning. We are at a time right now where the landscape for business owners to start thinking about selling is ideal, because you have low interest rates, you have the private equity funds full of dry powder, and now at least in the US, you have a tax cut that may or may not be temporary. We are starting to see interest from business owners that want to transact.”
Under incumbent president Donald Trump and his tax cuts for business, cash flows have looked healthier and so valuations should be up for the projected period, he said.
“The other thing is that, for the owners, a transaction is usually a highly taxable event. So if you have higher after-tax proceeds, now is actually a good time for these companies to transact. And we are definitely seeing interest from those business owners who want to start doing something.”
Innovation investment still awaiting pioneer results
As investment advisors, Antarctic is seeing most companies with innovative production plans still waiting on the results of the field’s pioneers, said Brynjolfsson.
“What’s happening with Atlantic Sapphire, what’s happening with the guys [Nordic Aquafarms] up in Maine, those are massive investment amounts that are being put into R&D and greenfield projects, and that’s very good for the industry,” he said.
“I cannot tell you how many people approach us with innovative ideas, and I would say that many of them… they’re not properly thought through. Those that are well thought-through, and well executed, will definitely be successful. I think everybody’s looking at Atlantic Sapphire saying ‘I’m not going to be the first dollar, but if this takes off, then at least you have a proof of concept, and it’s been done before’.”
He agreed that plenty of US retailers may be ready to jump at the chance to market “locally-produced”, environmentally-friendly fish.
On the wider M&A picture, he suggested the sector is still yet to see some more examples of cross-sector deals, be that salmon players going into whitefish, whitefish companies going into farming, or perhaps fishing companies going into the development of aquaculture.
Cooke leading the way
On Brynjolfsson’s earlier points regarding US firms looking overseas for access to raw material, one of the key companies leading the way in this department has been Cooke Aquaculture and its wild catch sister, Cooke Seafood USA.
In May 2018 the firm made an offer for a 39.43-meter Argentine shrimp trawler owned by Grupo Continental Armadores de Pesca, sources with knowledge of process told Undercurrent.
In June Cooke was also said to be the favorite to buy Latin American shrimp producer Seajoy Group, according to sources. Seajoy, which has operations in Central America, in Honduras and Nicaragua, has been on the market for a few months.
“It’s been on the market for a while now and Cooke would make sense. Seajoy has done a great job at being a low-cost producer, with all the environmental approvals; it’s a good company,” one source told Undercurrent.