The planned acquisition of Peruvian fishmeal and fish oil producer Copeinca by China Fishery Group, part of the Pacific Andes seafood empire, is a chance for the company to emerge from the shadow of its past, sources told Undercurrent News.
Acquisitive Pacific Andes — in the process of buying fish finger production plants in Europe, as well as Copeinca — has long been a controversial company in the seafood sector.
In the early 2000s, the company was implicated in an illegal toothfish fishing operation by the Australian media, something it denied.
Then, last year, the Russian Federal Antimonopoly Service (FAS) accused the company of illegally controlling Russian fishing companies, which Pacific Andes also denied.
This has hit the value of the company’s bond and caused ratings agencies, such as Moody’s and Fitch, to downgrade the company.
Despite Moody’s and Fitch also being bearish on the Copeinca deal from a financing perspective, a senior seafood sector executive, wishing to be quoted anonymously, said he believes the Copeinca deal makes sense, for several reasons.
“They just have to shake the label they have carried from the allegations of poaching toothfish and of Russian payoffs,” he told Undercurrent.
With the move for Copeinca, Pacific Andes is securing “their business longer term”, he told Undercurrent.
“I actually think they have executed a sound strategy with regard to the fishmeal and oil products from Peru. They perhaps recognized before most that Peru was becoming more attractive for international investment, and becoming one of the ‘food baskets’ for agricultural and seafood products to North America,” he said.
“Long-term value for the Peruvian seafood products looks to be heading toward premium values as aquaculture feeds are in higher demand, and the health benefits from fish oils are now widely accepted,” the source told Undercurrent.
“The Peruvian species are known to be high in EPA and DHA, highly valued products in Japan. Couple that with a more responsible approach to fishing quotas by the Peruvian government and the investment looks sound, in the long-term,” he said.
Pacific Andes and China Fishery are, however, very dependent on the Ng family for management, said the source. Expanding in South America might force the company to hire more outside talent, seen as a positive step, the source said.
“They probably need to add some strong international management longer term, if they want to solidify the investment portfolio,” he told Undercurrent.
“If the German plans come off [where Pacific Andes is buying up fish finger plants] as well as Copeinca, they will need to look to get in more management, I would think,” he said.
‘Transformative’
A “successful integration of Copeinca’s operations represents a transformative event for China Fishery, aligning it closer to Chinese fish consumption and supply trends”, said a July 10 report on the company, from the Seaport Group, a US-based finance and analysis firm.
Other financial sector sources are not so convinced, but also feel the deal is a significant development for the company.
An Asia-based investment executive, who feels China Fishery is overpaying for Copeinca as it is striving to find a new story to tell investors, in light of the troubles in Russia, still labels the deal “transformative”.
The deal is “definitely transformative, at any price necessary”, said the executive, who wished to be quoted unnamed.
“This is case of small fish eating big fish, as the Chinese say,” he told Undercurrent.
China Fishery has “already borrowed a lot of money against its balance sheet, they ponied up even more money to get Copeinca at a record price”.
That’s despite the anchovy catch being disappointing in 2013 and the Peruvian government being concerned enough to act against overfishing, said the source.
“I think it all smells a bit of desperation, but let’s see,” he said, of the price China Fishery is willing to pay.
On July 17, China Fishery launched its new, improved takeover bid for Copeinca. The new offer price values the entire share capital of Copeinca at NOK 4.78 billion ($786 million)
At NOK 68.17 in cash per share in Copeinca, this new bid will cost China Fishery far more than it initially intended.
China Fishery already owns around 8.22% of shares in Copeinca, and it could now cost it around NOK 4.4bn ($730m) in cash to secure the rest of the shares.
That is far above its initial offer of NOK 3.15bn ($556m) for all the shares in the company, made on March 13.
To fund the higher bid, China Fishery said it would increase a loan facility to $401m from $295m.
The sequence of events in the lead-up to the bid is “puzzling”, said the Asia-based source.
“Why buy Copeinca now? China Fishery has been in Peru a while and should be familiar with it,” he said. “If it saw true value, it could’ve offered to buy Copeinca anytime in 2012, when Copeinca’s stock price was weak and China Fishery was flush with cash from a half-year bond.”
Copeinca shares started 2012 trading at NOK 33, before peaking at NOK 47, on Oct. 3. The share price was NOK 41.50 on Feb. 21, before rocketing to NOK 56.25 on Feb. 26, presumably as a result of takeover talk in the markets.
China Fishery could have chosen to bid when the share price was lower, instead of pre-paying its fourth so called long-term supply agreement, to secure access to Russian pollock for its processing plants, said the executive.
“Instead, they wait until this year, when they are cash-strapped and forcefully conducted a rights issue when China Fishery’s share price was weak, and even upsized the bid for Copeinca,” said the Asia-based executive.
On Nov. 14, China Fishery prepaid $150m to British Virgin Islands (BVI)-registered entity Perun Limited to secure all the fish harvested by its vessels.
Perun and another BVI registered firm Alatir are the two companies China Fishery deals with to secure Alaska pollock caught in Russian waters.
Negative ratings
Both Moody’s and Fitch, two of the three major ratings agencies, along with Standard and Poor’s, have issued statements rating China Fishery as negative.
On July 4, a week after Moody’s maintained a negative ratings outlook on China Fishery Group, Fitch ratings downgraded the company from stable to negative.
The ratings agency cited China Fishery’s higher-than-expected offer of $778m for Copeinca from the previously stated valuation of $600m as the main reason for downgrading.
Fitch makes no mention of the regulatory risks in Russia, but Moody’s does.
On one hand, Moody’s supports the fact the deal would lower China Fishery’s revenue and earnings reliance on its Russian contract supply business, “where the regulatory risk has been increasing”, to 41% and 47%, respectively, from 62% and 90% currently.
The contribution from the Peruvian fishmeal business would increase to 53% of total revenue from 30% previously, and to 65% of total its earnings before interest and taxes (EBIT) from 34% previously, said Moody’s.
Despite the obvious positives of the deal, “the increased financial leverage will likely reduce the headroom available under China Fishery’s bank loan covenants and lower its financial flexibility. Moody’s also expects the company’s liquidity to tighten, as it will need to refinance the bridging loan related to the acquisition upon its maturity in 12 months”.
However, Moody’s sees the ratings outlook as still negative, “reflecting: 1) the potential refinancing risk of the bridging loan and 2) regulatory uncertainties on its Russian contract supply business, which will contribute over 40% to its revenues even after the Copeinca acquisition”, it said.
The Seaport Group, the US based investment group, is more positive on the regulatory risk in Russia.
“It is our contention that a number of factors greatly reduce Russian regulatory risk,” it said, in a report dated July 10.
“China Fishery continues to operate under the existing agreements with its Russian partners” and also its “contractual right to recover any/all pre-payments would be financially deleterious to their Russian partners,” said the report.
“Most persuasively, that with the Copeinca acquisition China Fishery becomes a top global fishmeal supplier – a key input to growing aquaculture industry — and hence a company with whom the Russians will want to do business with in meeting their own protein consumption needs,” said Seaport Group.
Source: Undercurrent News
