A closer look at the Sanford-Sealord deal

By Hugh Stringleman

Thursday 8th April 2004

A merged Sanford-Sealord entity would try along with other major global fishing companies to become more of a price-maker in its major markets.

But the merged entity would have little or no influence on the negative factors that triggered the merger discussions, ABN Amro analyst Ben Slykerman believes.

These include the high value of the New Zealand dollar, smaller hoki catches, high fuel prices and market difficulties in greenshell mussels.

However a merged entity representing 45% of New Zealand seafood exports might be able to positively influence prices for the New Zealand-only products: orange roughy, hoki and greenshell mussels.

It could also rationalise seafood processing capacity and optimise the use of the fishing fleet.

Sanford has a significantly stronger balance sheet and profitability than Sealord. Sealord had $170 million of debt at balance date last year, compared with Sanford's $10 million net cash position.

"Given the state of the industry and the financial pain it may be causing the highly leveraged Sealord, Sanford should be able to negotiate this merger from a position of comparative strength," Mr Slykerman said.

One scenario for the merger has Sanford issuing shares for the incorporation of Sealord, creating an enlarged entity owned 50% by the present shareholders, 25% by Maori and 25% by Japanese.

The biggest shareholder in Sanford is Amalgamated Dairies, with more than a third of shares, now an endowment trust founded by the Goodfellow family.

The chairman of Sanford for the past 24 years has been Douglas Goodfellow, aged 87.

Beyond a common cause in catching their shares of quota fish and marketing it profitably, Sanford and Sealord have some significant differences that complement each other.

Sanford takes the least-cost route to processing and exporting as well and is the Auckland-based leader of the domestic fresh fish market.

Sealord believes in further processing to consumer-ready stage and has installed sophisticated cutting, cooking, coating, canning and packaging equipment at its big Nelson plant.

Sealord also has a sizeable stake in the domestic frozen portions and canned fish segments. It is working closely with Crop & Food and its Japanese half-owner, Nippon Suisan, to develop new consumer products, and nutriceuticals from waste product streams.

Sealord is not targeting inshore species, where the rule against aggregation of quota is set at 35% of the total allowable catch. Sanford brings that expertise to the table.

For deepwater species the limit is larger, at 45%, giving reason for the merged entity to be confident of obtaining regulatory approval.

Mr Slykerman said a major issue within the proposed merger would be the ownership of quota used by Sealord and its other half-owner, the Treaty of Waitangi Fisheries Commission, Te Ohu Kai Moana (TOKM).

"TOKM may want to keep its quota separate, thus protecting Maori's interest in the fishing industry."

So it is possible an enlarged Sanford would rent Sealord's quota on a long-term basis, which would also prevent the merger from breaching quota aggregation restrictions.

But that has significant risk and value implications for Sanford shareholders.

"Indeed, we would be surprised if the Sanford board and management approved a deal that did not transfer ownership of Sealord quota to Sanford," Mr Slykerman said.

An enlarged Sanford-Sealord would rank among the world's largest fishing companies, with about $US350 million in fish revenues.

American Seafoods, which claims to be the biggest in North American, has a $400 million turnover, with $280 million from ocean-harvested whitefish and the rest from land-based processing of catfish in Alabama.

It owns 10 large fishing-factory ships, each with up to 125 crew members. Seven of these fish the US Bering Sea pollock fishery, and pollock is the biggest whitefish category in the world.

Sandford managing director Eric Barratt said he knew of several large American, Canadian, Russian and Norwegian private fishing companies, often family-owned, which would rival a merged New Zealand entity.

The figures of these private companies were not disclosed, he said.

He agreed that fishing industries worldwide were characterised by small and medium-sized enterprises. He was not prepared to comment on what extra a much-enlarged Sanford could do in the international waters.

When asked about the time frame for the merger talks, Mr Barratt said: "Put it this way, it is in the interests of all parties to have a position to either proceed or disengage at the earliest possible time."

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