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Oceana finds fishy gold offshore

Acquires Daybrook Fisheries for R4 billion.

Oceana, South Africa’s biggest and most acquisitive fishing company, has clinched a deal with US fishing company Daybrook, to acquire all of its processing facilities and 25% of its fishing fleet for $385 million (R4.6 billion).

Daybrook is a privately-owned company that operates a North American fishery off the coast of Louisiana, 60 miles south of New Orleans. Its primary catch is Gulf Menhaden, a small oily fish that travels in huge schools and feeds on plankton near to the surface of the water.

Daybrook is the second largest processor of Menhaden in the US.

The fish are not for human consumption and instead are processed into fishmeal and fish oil products. While the anchovy caught off the South African and Namibian coasts yield 1.5% of their body weight in oil, these fish yield 13% in oil.

This is the equivalent of fishy gold in that fish oil is a primary source of Omega-3 fatty acids. While there is small and lucrative nutraceutical market for Omega-3s, the primary demand for these products is from the world’s fast growing aquaculture market.

The United Nations Food & Agriculture Organisation predicts that by 2030 farmed fish and wild fishing will each yield about 90 million tons of product. Currently around 40%, or 64 million tons, of the world’s total fish supply comes from aquaculture.

“The story here is one of demand outpacing supply. Farmed fish need to be fed with fishmeal and Omega-3s,” says Oceana CEO Francois Kuttel. “Demand is growing, but supply has remained the same.”

This imbalance is reflected in the company’s healthy gross margin. Daybrook’s turnover for the 2014 financial year amounted to $114 million (R1.3 billion) with EBITDA of $48 million (R569.4 million).

For years Oceana has been chafing at the limits imposed on its growth by South African government-allocated quotas on allowable catch and the limitations on the buying and selling of quota imposed by BEE regulations.

In 2012, following a complicated and lengthy process, the company received regulatory approval to acquire the Lusitania group. And last year, following an equally tortuous process that went all the way to the Competition Appeals Court, the company received regulatory approval to acquire the fishing interests of Foodcorp.

While Oceana remains interested in further investments in South Africa and Africa, it is a globally competitive company and the opportunity to diversify its operational geography, product profile and currency exposure was always attractive.

However buying offshore assets is also not without its challenges. “Regulatory authorities around the world are protective of their fishing grounds. In the US the control and ownership of licensed fishing vessels must remain with US citizens,” says Kuttel. “We have structured the deal to comply with this regulation.”

At the same time Oceana has entered into an agreement with Westbank (the company that will own 75% of the fishing vessel assets) to supply Daybrook Fisheries with its total catch for the next 30 years. The Fish Supply Agreement is renewable for another 20 years thereafter.

Oceana will settle the R4.5 billion acquisition cost in cash. It will fund this through a combination of cash and debt. Up to R2.4 billion will be funded from cash on hand. If there is a shortfall in cash available it will raise debt. This will be comprised of debt of R1.7 billion raised in the US and secured by the US companies and a R1.2 billion equity bridge facility from Standard Bank.

The bridging loan will be repaid out of the proceeds of a rights offer that will raise equity capital of R1.2 billion. Oceana shareholders Brimstone and Tiger Brands have agreed to follow their rights.

If additional funds are required, Lucky Star, a wholly-owned subsidiary of the company, will also raise R2.7 billion to refinance an existing short-term facility.

The deal requires approval from various authorities. Approval has already been won from US regulators who oversee fishing rights. Reserve Bank approval is pending.

Kuttel expects that the deal will be earnings accretive from 2017 onwards.

Oceana, which has gained 20% in a year, was trading at R101.02 at midday on Tuesday.

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Great deal from an M&A perspective. Standard Bank seem to love getting behind cross-boarder deals – assuming they’re the ones behind it? I’m pretty certain they are. Woolies & David Jones, and now this.

Oceana seem more like a buy now than ever!

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