Experts back whale-sized fishing merger

Nick Stride

Friday 26th March 2004

Analysts have come out strongly in favour of a merger of Sanford with Sealord, saying the proposed company would have the scale to compete in a battered global fishing industry.

"We lack global leaders in this industry. If New Zealanders can take that lead, that's very good news, so I hope this works out," Petur Einarsson, an industry expert with Icelandic bank Islandsbanki, told The National Business Review this week.

The proposed merger, which would create a company with revenue of $1 billion, faces an array of regulatory hurdles but analysts say it makes good sense in terms of the strength of New Zealand's presence in export markets.

If the merger came off, Einarsson said, the combined entity would still be only a small competitor in a highly fragmented industry.

The world seafood trade, he argued, is worth about $US100 billion a year so the merged company would have only 0.65%.

Even the world's biggest company, Japan's Nissui (a half-owner of Sealord) had a market capitalisation of only $US550 million, "and nobody's ever heard of it."

The merger would create a company only a little larger than the US' biggest company, American Seafoods, which has turnover of about $US400 million.

"The world whitefish catch is seven million tonnes. The whole New Zealand hoki quota is 200,000 tonnes, so it is only 2.8% of world whitefish," Mr Einarsson said.

Hoki wasn't a famous species that people would buy at any price. Major substitutes were hake, cod and Alaska pollock.

Fish also competed with other proteins, particularly chicken, which was today cheaper, popular and healthy.

"A major retailer [say, a supermarket chain] will be buying fish from 50 to 100 seafood suppliers, but chicken from fewer than 10," Einarsson said.

"Industry mergers are absolutely what's needed. The buyers are encouraging them because it's not easy to manage when you've got so many suppliers."

Another big trend of recent years was the growth of whitefish aquaculture or farming.

"Seafood companies have to consolidate to keep market share," Einarsson said.

Both Sanford and Sealord have seen their profits eroded by the high New Zealand dollar and by low prices.

A major international price driver has been the recent reversal of a long decline in global catches caused by past overfishing and by the extension in the late 1970s and the 1980s of economic zones by countries in the main fishing grounds.

New Zealand has been one of the few exceptions, with weather and environmental factors blamed for a continuing falling catch.

Analysts say the two are reasonably well-matched. With total assets of $498 million, Sanford is, on paper, smaller than Sealord, which has assets of $620 million.

Sanford is debt-free, whereas Sealord last June had term debt of about $170 million, according to accounts filed by parent Kura Ltd with the Companies Office.

Taking into account $22 million of one-off writedowns related mostly to its Argentinian operations, Sealord last year had ebit (earnings before interest and tax) of about $58 million, although analysts warn the data filed at the Companies Office doesn't give the complete picture.

If that figure is right, Sealord's profitability, as measured by ebit margin (sales divided by ebit) is 9.2%, the same as Sanford's.

Andrew Mortimer, an analyst at First New Zealand Capital, is enthusiastic about the merger, from Sanford shareholders' point of view.

"A deal makes sense given the potential for significant synergies, particularly through fleet and processing rationalisation," he said.

"Market strength in export markets would also assist with a high degree of consolidation of certain species allowing one face to export customers."

The major challenge the merger faces is aggregation of the two companies catches.

Under the 1996 Fisheries Act, ownership of the "total allowable catch" by one entity is restricted to one third of any species.

A Sanford-Sealord merger would give the combined company more than 33% in 10 of 14 species, including the important hoki and squid categories.

The two companies are expected to argue national interest considerations would outweigh regulatory threshold breaches.

Comments from our readers

No comments yet