CASE STUDY: Clearwater Fine Foods Recent Venture
Case Study:
The proposal of Clearwater Fine Foods of Nova Scotia (NS) on the 6th September 2001 for integrating with fishing giant Fisheries Products International (FPI) of Newfoundland (Nfld) was the result of an aggressive move by Clearwater to gain control of the Board of Directors at FPI and to oust the existing FPI management. This case study examines the fascinating ventures of these two firms and their current business positions leading up to the recent events of the takeover attempt, and subsequent reaction and withdrawal of the proposed merger. The implications for international markets and competition and / or domestic relations in Atlantic Provinces namely NS and Nfld, employment, fish allocations, etc., are discussed. The purpose of this report is to describe a business case study of the firms involved including, historical background on the situation, as well as to provide a critical assessment of the imminent future reconciliation of business strategy in the fishing sector.
Research member:
Dr. Daniel Lane (Supervisor)
Arthur So
Date: 1st March 2002
Table of Contents
Abstract 3
Introduction 4
Historic background 5
Highlights and milestones of FPI 5
Reference 7
Highlights and milestones of Clearwater 8
Reference 9
Business Drivers 11
FPI 11
Clearwater Fine Foods Inc. 11
Global Markets Analysis 12
Domestic Markets Analysis 17
The Merger Reaction 19
Critical Success Factors and Risks Analysis 20
Projection of the acquisition of FPI by Clearwater 21
Conclusion 22
References 24
Annex A 27
FPI 2000 / 2001 Financial Report 27
Annex B 32
Monthly Average of the Stock Prices 32
Abstract
The announcement from the Chairperson of Fishery Products International Ltd. (FPI) on the 6th September 2001, at St. John's, Newfoundland (Nfld), to acquire the assets of Clearwater Fine Foods Inc. for $510 million would have resulted in the creation of the largest seafood company in Canada. The closure of the transaction was eventually aborted by FPI after a concerted effort by Newfoundland provincial politicians and the negative public reaction on subsequent statements made by FPI regarding its proposed strategic plan for Newfoundland fish plants. This study describes the events leading up to the proposed merger, and the circumstances that followed the merger’s demise. As a business case, the purpose of the report is to analyze the background of the key parties to the proposed venture and its potential impact on the fisheries business sector and its stakeholders. This will include FPI employees’ employment stability and the assessment of the impact of market share, nationally and internationally by its products and its global competitors. In the course of this study the unique status of the FPI Shares Limitation Act, through the governing Nfld provincial legislation, is reviewed along with Provincial and Federal law that have, at once, supported the growth of FPI and presented insurmountable obstacles that jeopardized the completion of the merger.
The report provides with the evaluation of merger’s proposed intention for securing international markets and its expectation of long-term profitable business operations. It concludes with a critical assessment of the future impact on the fisheries business sector in Atlantic Canada.
Introduction
The scallop fishery on Georges Bank has been developed since 1940. Since 1973, there were 76 licenses awarded for vessels greater than 65 foot according to the Department of Fisheries and Oceans (DFO) Offshore Scallop 2000 report. In 1977, Canada had the concept of a 200-mile exclusive fisheries zone but it was not incorporated into Law of the Sea Convention (“UNCLOS III”) until 1982. This extended jurisdiction was to enforce and to protect the Atlantic depleting fish stocks. The fishing industry crisis was first recognized as early as in 1928. There was the Report of the Royal Commission on Maritime and Quebec Fisheries that raised the issues of the Atlantic fishing industry. Fifty years later, the Prime Minister announced the appointment of a Task Force on Atlantic Fisheries on January 9, 1982 to address the similar problem. The primary objective of the Task Force was to recommend “how to achieve and maintain a viable Atlantic fishing industry, with the consideration for the overall economic and social development of the Atlantic Provinces”. Dr. Michael Kirby headed this Task Force and the report, was completed in December 1982. The report, later referred to the Kirby Report consisted of three major key elements: the environment, the options and the recommendations respectively. Unfortunately, the depletion of Atlantic species continues to threaten it’s the local economy and the growth of the communities. The world oil crisis during the same period has also raised the cost to run the business. Other measures are required to stimulate the economy of the Atlantic Provinces along with the subvention from the government.
The main Atlantic coast catches are always species like cod, herring, lobster and scallops. By 1984, the fisheries industry has seen an increase of bankruptcies and high unemployment in the region. The company Fisheries Products International (FPI) was formed by re-grouping some of the bankrupted fishing companies into one with the subvention from the provincial government. Mr. Vic Young was then appointed as FPI’s CEO when FPI was privatized in 1987 and he remained with the company until 2001. One of his major achievements was nursing FPI through the cod moratorium without closing any plants during the period of 1992 and 1993.
The removal of Mr. Vic Young and his replacement with Mr. Derrick Rowe as CEO of FPI in May 2001 has been interpreted as part of a direct strategy of Mr. Risley to acquire FPI after an earlier failure to take over the same company in 1999. This study begins with the past events and milestones of both companies and then describes the business drivers that fuelled the interest in such a merger. It then follows with an analysis of the global and domestic markets that will enable further understanding of Mr. Risley’s vision in the fisheries business. The discussion of diversified of fisheries and the value-added in the products in order to compensate the decrease of revenue and fish stocks have been seen as Mr. Risley's business strategy. The would-be acquisition is analyzed in terms of critical factors and risks especially with the disputes from the employees and the union. A projected plan of action is considered that would persuade the opponents about the advantages of this merger if it were successful. The study concludes with a critical analysis of the future impact on the fisheries business sector in Atlantic Canada in short and long term.
Historic background
Highlights and milestones of FPI
The 1982 Kirby Report showed the deficiencies of the Atlantic fisheries and outlined recommendations to remedy the situation. In 1984, seven bankrupt, ruined fisheries companies in St John’s formed FPI with a $150 million rescue package from the Newfoundland (Nfld) provincial government. FPI reverted into a profitable company, paid off its debts and then converted into a public company traded on the Toronto Stock Exchange in 1987. The company has also created the 15% limitation of right to vote share ruling on each shareholder. This particular Act was to ensure that there is no monopoly takeover of the business and that the workers’ employment is protected. The company was under Mr. Vic Young’s direction from 1987 until Mr. Derrick Rowe replaced him in May 2001. The most significance work that Mr. Young did was nursing the company through the cod moratorium without closing any plants in 1993. FPI participates as the dominant player in the seafood industry of Nfld and Labrador, especially in many rural communities. Therefore the announcement of the merger and the intention of closing fish plants were considered as uninvited economic solution to the communities. Although there is an “open for business” economic policy adopted by Nfld and Labrador government some time ago, the reduction of work force strategy has violated the main theme of their Renewal Strategy for Jobs and Growth that was released in 2001 by the same government. Hence, the proposed merger was viewed by the workers as a hostile takeover without the consideration of the local community economic and tradition.
Fig I Share Prices Performance 1999 - 2002
Fig 2 Financial Data
2000 / 2001 / 2002eEarnings per Share / 0.90 / 0.89* / 0.94
Price to Earnings (times) / 10.0 / 10.1 / 9.6
Dividend ($) / 0.15 / 0.18 / 0.18
Dividend Yield (%) / 1.67 / 2.00 / 2.00
Book Value ($) / 12.96 / 12.75 / 13.51
Price to Book Value (times) / 0.69 / 0.71 / 0.67
*Excluding extraordinary cost of $0.96
Trace through the annual reports – purchase and diversification of FPI; sale of offshore trawler fleet.
The company operates with eight onshore processing facilities in Newfoundland, three vessel service and/or refit centers in Newfoundland and Nova Scotia, a fleet of 13 groundfish vessels, and one frozen-at-sea cold water shrimp processing vessel. FPI employs about 2,600 employees and purchases fish and shellfish from more than 3,000 independent harvesters in Newfoundland. For the year ended December 2001 (Annex A), FPI recorded income before unusual items of $10.5 million (69 cents per share) on sales of $703.1 million. There is a $20.1 million decrease from the 2001 sales and net loss for the year was reported as $1.0 million (7 cents per share) compared to year 2000 sales of $723.2 million with a net income of $13.6 million (90 cents per share) in 2000 [1]. Their auditor Ernst & Young prepared the company consolidated financial statement and commented that the gross profit decrease was due to several factors. The principal cause was the lower pricing of shellfish, coupled with higher costs associated with groundfish operations. There are also the unusual items expenditures of $14 million incurred for the year 2001 for such things as the proxy contest costs, severance costs for the previous managing directors and other write-off costs as described in the 2001 financial statement.
Date / Description /Reference
1973 / 76 Licences for vessels > 65’ LOA / DFO Offshore Scallop 2000 Report1980-82 / Kirby Report on Atlantic Fisheries with survival recommendations / Navigating Troubled Waters, Kirby Report
1984 / Less than 2000t of scallop, lowest catch on record / DFO Offshore Scallop 2000 Report
1984 / FPI was formed by integrating the bankrupt ruins of seven companies and $150 M rescue package from NS provincial government / Macleans Apr, 2001
1987 / FPI Privatized into public company with the 15% stock limitation act and paid off debts / CBCA Canadian Press Newswire, May 1, 01
1992 / Vic Young, FPI, nursed through the cod moratorium without closing any plants / CBCA search – Financial Post May 2’01 pg C1, C10
1992 / Groundfish moratorium devastated the Atlantic fishery with cod the major hit / Canadian Business, Apr 30, 1999, Vol 72 no8 p50-2
1999 / Clearwater’s bid to take over FPI / http://www.seafoodbusiness.com/archives/searchframe.asp
01/05/2001 / 82% in favour of replacing the existing board of directors / Kevin Cox, Canadian Press, 2 May 2001
06/092001 / Announced the FPI and Clearwater merger / Canada NewsWire
Sep 2001 / Minister responds to FPI’s proposed acquisition / http://www.gov.nf.ca/releases/2001/fishaq/0906n05.htm
18/01/2002 / Gerry Reid, Minister of Fisheries commented on the acquisition and FPI’s 15% share limitation act / FPI Press Release 18/01/2002
22/01/2002 / FPI plan to revamp groundfish processing by eliminating 580 jobs and modernizing 3 plants in Nfld / World Watch 22/01/2002
28/01/2002 / Provincial hearing of the FPI Act and Hon John Crosbie / Canada NewsWire
15/02/2002 / FPI announced not to proceed with the acquisition / globeinvestor.com
21/03/2002 / Amendments to the 1987 FPI's15 per cent ownership restriction be extended to include all company shares / Canada Newswire
03/05/2002 / Agreement with the union / Canada NewsWire
15/05/2002 / -Appointed Mr. Rowe as President and CEO
-23% increase in the first quarter earnings / Canada NewsWire
Highlights and milestones of Clearwater
Mr. John Risley and his brother-in-law, Mr. Colin MacDonald first started as local lobsters retail outlet in Bedford, NS in 1976. They then expanded to wholesale export in Boston seafood markets before the company becomes a multi million international business. By 1988, this company has fourteen plants with three in United Kingdoms and eight in the USA and has a work force of 1,800. The seven corporate license holders of the offshore quota for the 24 vessels that harvests of more than 45 million pounds of product per annum with an estimated wharf value of $60 million annually. Their catches are mostly lobster, scallop, clam and shrimp. Mr. Risley diversified his business into fisheries processing plants in which he predicts that the ready-to-serve business will be the future driver of the business. Hence the company emphasis on new species development and bleeding-edge process technology in each of its major production lines. As a consequence, Clearwater has invested more than $200 million in processing plants and vessels upgrades over the past five years. Mr. Risley’s use of technological innovation to support persistent marketing has been successful throughout his business.