Seafood M&A momentum faces fresh uncertainty as financing conditions tighten

‘Going into this year, we were very optimistic that the number of transactions was definitely going to be higher than last year, [but] some things have gotten in the way’ –Michael Richard, Wells Fargo

BOSTON, Massachusetts, US — Consolidation in the US seafood industry remains a long-term inevitability, but the pace of mergers and acquisitions may slow in the near term as geopolitical uncertainty, inflationary pressures and volatile operating costs weigh on dealmaking.

That was the consensus of the four seafood industry lenders and advisors sitting on the finance panel this week at Seafood Expo North America. They said current market conditions have injected caution into financing decisions.

“Going into this year, we were very optimistic that the number of transactions was definitely going to be higher than last year,” said Wells Fargo senior vice president Michael Richard, the leader of the bank’s national seafood practice. “Some things have gotten in the way… but overall, long term, we remain excited about the potential to support consolidation in this industry.”

The seafood sector has navigated several turbulent years since the COVID boom that boosted retail seafood demand and resulted in record profits for many companies.

The industry has only recently begun stabilizing after dramatic inventory swings and price collapses that spooked lenders, added John Doucette, managing director of Rockland Trust’s commercial lending division.

“Two or three years ago, we were coming off a period where a lot of clients had significant inventory adjustments,” he said. “Banks pulled back and said, ‘Wait a minute, if crab can fall 60% in nine months, where are we with our advance rates?'”

However, since then, financing conditions for day-to-day operations have improved, Doucette said.

“Now we’re seeing advance rates on receivables and inventory as aggressive as they’ve been in decades,” he said.

Nevertheless, companies are operating more conservatively these days, particularly when it comes to inventory management.

“Our borrowers today are carrying less inventory from a volume perspective,” Richard said. “They’re just being more cautious about how far out they go.”

M&A demand driven by succession, scale

Despite macroeconomic headwinds, the structural drivers behind seafood industry consolidation remain intact.

One of the most important factors is generational transition, the bankers said.

“A lot of folks went through the more difficult times in 2022 and 2023, and they’re [now thinking] about succession,” Doucette said. “There are a lot of folks in the Northeast at the age where they’re thinking about how they protect what they’ve built.”

But scale is also becoming increasingly necessary to compete for the business of the largest retail buyers and foodservice distributors.

“If you look at other proteins — beef, chicken and pork — maybe five or six companies do everything,” Richard said. “The seafood industry has thousands of companies. Over time, it’s important the industry finds that scale in order to remain relevant with its buyers.”

Consolidation can also help companies justify major investments in processing efficiency, technology and infrastructure, the panel’s moderator, Antarctica Advisors managing director Ignacio Kleiman, noted.

“If you’re too small a player, investing $5-10million to retool a plant isn’t feasible,” he said.”You need to be larger to achieve that efficiency.”

Strategic buyers preferred over private equity

Doucette said seafood industry lenders remain open to financing acquisitions, but are cautious about highly leveraged deals.

Strategic buyers — companies acquiring competitors or complementary businesses — tend to be viewed more favorably than private equity-backed acquisitions, he said.

“We’ve seen strategic acquirers have great success,” Doucette said. “When it’s pure private equity with a five- or seven-year turnaround, that becomes more challenging, because this industry runs on cycles.”

He noted seafood markets typically follow a five-year pattern.

“There are three good years, one great year and one not-so-great year, “he said. “If you lever up too much, eventually you’re going to hit a bump in the road.”

In contrast, long-term strategic buyers often bring more equity to deals and plan for multi-decade ownership.

“They’re saying this is a 20-year plan,” he said. “They’re not trying to squeeze every expense item.”

The main change in M&A financing in 2026 may come from lower borrowing costs if interest rates fall later this year. Most banks had predicted two interest rate cuts to the federal benchmark rate this year, but some experts have revised that prediction to one or zero cuts due to the launch of the war in Iran.

“We are still projecting a couple of rate cuts this year. Obviously, the Middle Eastern situation has slowed down the timing of those rate cuts, but we’re still planning that by the end of this year, the economy will be able to work through this,” Richard said. “The overall trend is toward a lower cost of capital.”

Private credit largely absent from seafood

While private credit funds have surged across many industries, the panel said the model has yet to gain traction in the seafood industry.

Private credit lenders –typically unregulated investment funds — can offer more flexible loan structures, but that usually comes at the cost of significantly higher interest rates.

“They can look at higher leverage points and fewer covenants. So they have an ability outside of a regulated institution like ours to do some things uniquely different,” Richards said. “But flexibility isn’t free.”

Because seafood businesses often operate on relatively thin margins, the cost of such financing can be prohibitive for most seafood businesses, Doucette said.

“Unless you have a [huge] growth margin, [those high lending costs]eat into your margin. If there’s a bump in the road, it’s a time bomb,” he said.

In addition, many private credit investors prefer industries with predictable growth patterns.

“They’re used to graphs that look like this,” he said, gesturing upward. “You don’t see that very often in seafood.”

Deals that make sense

For companies facing volatility or sudden difficulties, quick communication with lenders is critical, according to Jason Brantley, senior vice president and Alaska market manager at Columbia Bank.

“The best thing you can do is communicate and be transparent, “Brantley said. “We would much rather have a conversation about something, even if [the worst] doesn’t happen, than be blindsided.”

Strong relationships remain a defining feature of seafood finance, Doucette agreed.

“This industry is all about relationships,” he said.

That relationship-driven dynamic is likely to shape the next wave of industry consolidation, Brantley added.

“Consolidation for its own sake doesn’t make sense,” Brantley said. “The key is, can you find the combination that achieves [success]?”

 

SOURCE: Undercurrent News