CASE STUDY: Clearwater Fine Foods Recent Venture
Case Study:
The proposal of Clearwater Fine Foods of Nova Scotia (NS) on the 6 th 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
dlane@uottawa.ca (Supervisor)
Arthur So
aso@uottawa.ca
Date: 1st March 2002
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CASE STUDY: Clearwater Fine Foods Recent Venture
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
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CASE STUDY: Clearwater Fine Foods Recent Venture
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.
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CASE STUDY: Clearwater Fine Foods Recent Venture
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 200mile 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
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CASE STUDY: Clearwater Fine Foods Recent Venture
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 $150 million rescue package from the Newfoundland
(Nfld) provincial government. FPI reverted into a profitable company, paid off its debts and
then converted into a public company traded on the Toronto Stock Exchange in 1987. The
company has also created the 15% limitation of right to vote share ruling on each shareholder.
This particular Act was to ensure that there is no monopoly takeover of the business and that
the workers’ employment is protected. The company was under Mr. Vic Young’s direction from
1987 until Mr. Derrick Rowe replaced him in May 2001. The most significance work that Mr.
Young did was nursing the company through the cod moratorium without closing any plants in
1993. FPI participates as the dominant player in the seafood industry of Nfld and Labrador,
especially in many rural communities. Therefore the announcement of the merger and the
intention of closing fish plants were considered as uninvited economic solution to the
communities. Although there is an “open for business” economic policy adopted by Nfld and
Labrador government some time ago, the reduction of work force strategy has violated the
main theme of their Renewal Strategy for Jobs and Growth that was released in 2001 by the
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CASE STUDY: Clearwater Fine Foods Recent Venture
same government. Hence, the proposed merger was viewed by the workers as a hostile
takeover without the consideration of the local community economic and tradition.
Fig I Share Prices Performance 1999 - 2002
Fig 2 Financial Data
2000
2001
2002e
Earnings per Share
0.90
0.89*
0.94
Price to Earnings (times)
10.0
10.1
9.6
Dividend ($)
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
Page 6 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
$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
1973
1980-82
1984
1984
1987
1992
1992
1999
01/05/2001
06/092001
Sep 2001
Description
76 Licences for vessels >
65’ LOA
Kirby Report on Atlantic
Fisheries with survival
recommendations
Less than 2000t of scallop,
lowest catch on record
FPI was formed by
integrating the bankrupt
ruins of seven companies
and $150 M rescue
package from NS provincial
government
FPI Privatized into public
company with the 15%
stock limitation act and paid
off debts
Vic Young, FPI, nursed
through the cod moratorium
without closing any plants
Groundfish moratorium
devastated the Atlantic
fishery with cod the major
hit
Clearwater’s bid to take
over FPI
82% in favour of replacing
the existing board of
directors
Announced the FPI and
Clearwater merger
Minister responds to FPI’s
Reference
DFO Offshore Scallop 2000 Report
Navigating Troubled Waters, Kirby Report
DFO Offshore Scallop 2000 Report
Macleans Apr, 2001
CBCA Canadian Press Newswire, May 1, 01
CBCA search – Financial Post May 2’01 pg
C1, C10
Canadian Business, Apr 30, 1999, Vol 72 no8
p50-2
http://www.seafoodbusiness.com/archives/sear
chframe.asp
Kevin Cox, Canadian Press, 2 May 2001
Canada NewsWire
http://www.gov.nf.ca/releases/2001/fishaq/090
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CASE STUDY: Clearwater Fine Foods Recent Venture
18/01/2002
22/01/2002
28/01/2002
15/02/2002
21/03/2002
03/05/2002
15/05/2002
proposed acquisition
Gerry Reid, Minister of
Fisheries commented on
the acquisition and FPI’s
15% share limitation act
FPI plan to revamp
groundfish processing by
eliminating 580 jobs and
modernizing 3 plants in Nfld
Provincial hearing of the FPI
Act and Hon John Crosbie
FPI announced not to
proceed with the acquisition
Amendments to the 1987
FPI's15 per cent ownership
restriction be extended to
include all company shares
Agreement with the union
-Appointed Mr. Rowe as
President and CEO
-23% increase in the first
quarter earnings
6n05.htm
FPI Press Release 18/01/2002
World Watch 22/01/2002
Canada NewsWire
globeinvestor.com
Canada Newswire
Canada NewsWire
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
Page 8 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
technological innovation to support persistent marketing has been successful throughout his
business.
Date
1976
By 1988
1989
1997
1999
06/09/ 2001
18/01/2002
18/03/2002
Description
Clearwater formed by John
Risley and Colin MacDonald
Clearwater operated 14
plants with 3 in UK and 8 in
US
Clearwater closed groundfish
plants,150 people out of work,
sold foreign assets-Hillsdown
deal
John Risley was named
entrepreneur of the year by
Ernst & Young
Bidding of FPI
Second attempt to acquire
FPI with 16 million non-voting
shares, $100 million in
preferred shares and assume
Clearwater's $210 M debt
Public hearing of Nfld
Fisheries Minister to the FPI
Act
Interview of John Risley by
Jason Kirby
Reference
Macleans Apr 30, 2001, vol 114 no18, p 34,36
Canadian Business Apr 30,1999, Vol 72 no 8 p
50-2
Canadian Business Apr 30,1999, Vol 72 no 8 p
54+
Canadian Business, Apr 30, 1999
Canadian business Dec 31,2001, Vol 74 no
24, p95
Canadian business Dec 31,2001, Vol 74 no
24, p95
Worldcatch.com, Article ID=6944
Canadian Business; Toronto; Apr 1, 2002; Vol.
75, Iss. 6; pg. 21
Clearwater Fine Foods Inc. sales charts by regions and by species in the year 2000 were
obtained from the company as shown below. Due to the privacy status of the company, no
actual accounting figures were provided.
It is evident that the majority of its species are
shellfish; mainly lobster and its markets are concentrated in North America.
Page 9 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
2000 Sales by Region
JAPAN
14%
NORTH
AMERICA
54%
EUROPE
22%
ASIA OTHER
10%
2000 Sales by Species
Cl ams
17%
Shrimp
18%
Co d
8%
Crab
2%
Scall ops
30%
Lobster
19%
O ther Seafood
6%
Courtesy from Clearwater Inc.
Page 10 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
Business Drivers
We now analyze the business drivers of the two firms in terms of performance and operational
success in harvesting, production and marketing of fish. With the identification of the main
components as strategy or improvement, business excellence could be achieved in the post
merger era.
FPI
FPI is one of the largest suppliers of seafood in North America.
Its primary catches are
groundfish and shellfish as indicated in the company annual report. The company has also
been a leader in developing and implementing new and sustainable harvesting techniques.
Much of this innovative harvesting research is carried out in partnership with the Marine
Institute at Memorial University, Newfoundland. In addition, the company has diversified into
the prepared seafood industry. Branded under the FPI, Mirabel, Sea Cuisine and Maripac
labels, FPI products are marketed to foodservice and retail customers in over fifteen countries.
FPI is also the exclusive international marketer of Atlantic Queen Seafood’s Luxury brand
snow crab products.
Clearwater Fine Foods Inc.
Clearwater’s sales of live lobsters by air shipment to the US is not only the first Canadian
company that broke through the US lobster markets but it has also opened the door to Asia
and European markets. The success has extended more recently in the development of surf
clam and shrimp markets in Japan and China.
Much of Clearwater’s recent growth has come from successful joint venture relationships with
a diverse range of partners as the following:
Glaciar Pesquera – an Argentine subsidiary;
Clearwater Ocean Prawns Joint Venture in the Northern Shrimp Management Plan (19971998);
Unaaq Fisheries - an Inuit joint venture in Canada’s northern shrimp fishery since 1987;
Deep Sea Clam Company and Knickle Ltd. Both with surf clam and sea scallop fisheries;
Ocean Nutrition Canada in marine based nutritional products.
Page 11 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
The above information was extracted from the company’s backgrounder about its growth
strategy. The company’s combination of business partnerships and strategic investments has
shown its interest in the diversification into marine based nutritional products. The company
has also plan to establish sales offices in each of its marketing group over the next two years
around the world in countries such as Japan, China, France, Germany, Spain, Belgium, and
Norway etc. The geographic diversity of its markets will also be supported by the diverse
language and cultural backgrounds.
Global Markets Analysis
The 1999 and 2000 aquaculture imports and exports statistics obtained from DFO has
demonstrated that there is an overall increase in both imports and exports for Canada. This
report has only selected exports / imports for species such as finfish, groundfish, cod, clam,
scallops, lobster, crab and shrimp and the countries such as USA, EU & non-EU, Central &
South America, Japan, China, Taiwan and Thailand to be analyzed. It is proven that the effort
in augmenting exports will stimulate the local and Canadian economy.
Grand Total
Imports
Exports
Quantity
426,918
495,976
Jan to Dec,
2000
Value
2,018,619
4,067,363
$/KG
4.73
8.20
Quantity
488,422
506,312
Jan to Dec,
1999
Value
2,008,219
3,742,283
$/KG
4.11
7.39
The following charts are compiled from 1999 and 2000 data showing the exports / imports of
the above selected countries and species in sales and tonnages. The figures will be used to
demonstrate the benefit of the proposed merger.
Page 12 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
Canada Export / Import 1999 of Species by Countries
3000000
2500000
2000000
1500000
1000000
500000
0
USA
EU
NonEU
C&S
America
Japan
China
338446
57353
6393
19868
50795
12936
Import Tonnes
196671
20560
90105
79035
4123
Export $
2581440 360262
29746
52635
480888
Import $
873009 106119 308715 142502
22059
Countries
Export Tonnes
Taiwan Thailand Others
7497
3279
9745
17538
7497
44090
28803
93797
23981
24316
95218
79612
22027
278769 175407
Page 13 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
Canada Export / Import 1999 by Species
1200000
1000000
800000
600000
400000
200000
0
Cod
Clam
Scallop
Lobster
Shrimp
Crab
Others
minus NES
Export Tonnes
25671
76698
6092
39886
40084
59442
154063
Import Tonnes
12637
2910
3256
15386
60541
7771
222319
Export $
206429
70309
124672
793289
267642
630999
1196470
Import $
45111
30101
35736
190429
505517
43414
825345
Species
NES – Not Elsewhere Specified.
Page 14 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
Canada Export / Import 2000 of Species by Countries
3000000
2500000
2000000
1500000
1000000
500000
0
EU
NonEU
C&S
America
Japan
China
Export Tonnes 345629
50262
3142
15646
46944
14394
6812
2783
10364
Import Tonnes
197820
18525
73742
32933
2910
19612
9433
39594
32349
Export $
2898637 326577
21314
36043
525719 109640
27199
23369
98865
Import $
897648
285702 117872
18294
23069
281658 212053
Countries
USA
83286
99037
Taiw an Thailand Others
Page 15 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
Canada Export / Import 2000 by Species
1400000
1200000
1000000
800000
600000
400000
200000
0
Species
Export Tonnes
Cod
Clam
Scallop
Lobster
Shrimp
Crab
Others
minus NES
24133
7440
8375
42704
42038
55677
218005
9302
2574
3379
17364
66369
8890
210515
Export $
192356
71462
158268
897254
303468
719636
1253669
Import $
31357
24868
42583
199818
560878
44431
797903
Import Tonnes
Page 16 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
Domestic Markets Analysis
Canada Export 1999 vs Clearwater & FPI
Sales in CAD '000
$3,742,283
$2,581,440
$4,000,000
$3,500,000
$3,000,000
$2,500,000
$480,888
$2,000,000
$360,262
$29,746
$1,500,000
$108,306
$1,000,000
$500,000
$64,712
$53,849
$11,966
$52,635
$93,797
$23,981
$24,316
$95,218
Canada Exports
$44,038
$33,662
FPI
$40,387
$26,925
$16,454
Clearwater
Countries
Others
Thailand
Taiwan
China
Japan
Central & S. America
Non EU
EU
USA
Canada
$0
Clearwater
FPI
Canada Exports
Page 17 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
Canada Export 2000 vs Clearwater & FPI
Sales in CAD
'000
$4,067,363
$4,500,000
$2,898,637
$4,000,000
$3,500,000
$3,000,000
$2,500,000
$525,719
$2,000,000
$326,577
$21,314
$1,500,000
$111,463
$67,960
$1,000,000
$109,640
$36,043
$27,199
$98,865
$23,369
Canada Exports
$47,780
$40,920
FPI
$76,994
$13,390
$500,000
$36,823
$23,433
$16,738
Clearwater
Countries
Others
Thailand
Taiwan
China
Japan
Central & S. America
Non EU
EU
USA
Canada
$0
Clearwater
FPI
Canada Exports
The above two years of Canadian and the two companies exports statistics showed that there
is the advantage of bargaining power in the pre and post merge (if in lieu). The combined
operation would cut down the administrative tasks and sharing resources in terms of
manpower and material. In doing so, the cost of operation could be lowered; the fisheries
prices could therefore be lowered to compete with the world markets. Increasing exports
especially to the US markets could be a successful spin-off to the Canadian economy.
Page 18 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
The Merger Reaction
The first takeover of FPI was attempted in 1999 by Mr. Risley but failed. Mr. Risley currently
owns 13.6% of the FPI voting shares and has control of nearly 40% of FPI shares with the
combination of Clearwater, Icelandic and Bill Barry’s firm.
The announcement on the 6 th
September 2001 of the offer of Clearwater to acquire FPI has created an issue with the
Newfoundland Provincial Fishery Products International Limited Act1 on Chapter F-15 in which
the most concerned item is the limit of 15% voting shares ruling.
The merger transaction was subjected approval from governmental regulatory bodies, Bureau
of Competition Policy, Industrial Canada and shareholders. In the meantime, Mr. Risley was
also promoting the modernization of the fish plants and this would lead to streamline its
operations and minimize the work force.
The idea of decrease work force has sparked
opposition to such merger by the local communities and government bodies. A comment from
the Provincial Fishery Minister, Mr. Gerry Reid, has led to an inquiry of this venture. This later
resulted in the imposition of a 15% ownership cap on all types of votes by the Newfoundland
Premier Roger Grimes on the 28th January 2002. There was criticism about the amended act
and the Premier’s “open for business” initiatives to encourage investment in the region have
been challenged in the Canadian Business communities.
Finally, on the 15 February 2002, FPI announced that they would not proceed with the merger.
A journalist, Jason Kirby, later interviewed Mr. Risley in March about the withdrawal of the
merger but he did not indicate any particular reason to recede the transaction. The interview
terminated with the impression that Mr. Risley will not abandon the idea of acquisition and he
will try again with other venues [9].
Apart from the opposition from the Newfoundland locals, the merger would have created the
largest Canadian fishery firm in the eyes of the business world. FPI and Clearwater could
increase its sales by combining both company value-added businesses. The Atlantic fishery is
proven to be volatile due to external risks such as government-induced quotas and depleted
fish stocks.
1
Nfld Fishery Products International Act
Page 19 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
Critical Success Factors and Risks Analysis
In order to have completed the merger transaction successfully, there were several major
factors that needed to be considered. The FPI Shares Limitation Act presents an obstacle
because Mr. Risley’s amount of voting and privileged shares indicated above.
The Nfld
provincial government has also amended the 15% limit across all categories of shares in
January 2002 so that Mr. Risley would not qualify to bid for the merger. The announcement of
modernization of the fish plants that may cause the closure of the plants may be pre-mature
without prior seeking a public approval of the merger. The workers in the communities would
only assume that the closing of the plants would decrease employments from their past
experience extracted from the Business Magazine – Atlantic Report, v 27(1) March, 1992 pg
16-20.




In February 1992, there were 7,000 fewer jobs in Newfoundland and the Hibernia
spending was cut by 50%, increasing the unemployment rate to 18.9%.
In 1991, FPI closed its Catalina plant, affecting 1,000 jobs.
In March 1992, FPI closed its Marystown plant.
In 1991, National Sea Products (NSP) closed down its Newfoundland operations, laying
off 375 workers in Arnold's Cove and 170 at its St. John's trawler base.
From a global market point of view, the merger could probably lower the fish prices and allow
for competition in world markets such as Japan, China, Europe and the US. But we have to
investigate into the import and export fishery products treaty with other countries. Abiding the
quotas and restrictions could offset this opportunity.
The stock market is very much sensitive to any changes within the company and the economy.
The following stock prices for the past five years reflect the ups and downs for FPI. As an
example, the replacement of Mr. Vic Young by Mr. Derrick Rowe on the 1 May 2001 has
probably caused the peak of share price of $11.50 on the 30 April 2001 prior to the
announcement of the Board of Directors replacement. The stock prices stabilized until the
merger news on the September 6, 2001 in which the share has peaked to almost $11 again.
Page 20 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
Then the price was on the downward trend to below the $8 value in the beginning of February
2002. This was due to the negative view of the merger and protest from the public especially
the resident of Newfoundland as discussed above. Once the merger proposal was withdrawn
on the 14 February 2002, the price went back up and the company is trading presently
between $8 and $9.
Observing the Newfoundland tradition can be considered as criteria to the success of the
merger. In a community of Newfoundland, trust and respect can gain a lot of support of the
people and the local government. In addition, Mr. Risley’s decision to close a Clearwater
groundfish plant in 1989, throwing 150 people out of work did not gain the confidence of
Newfoundlanders.
employees.
Implementing new technology can always cause resistance from
They have to be re-trained and the productivity would decrease due to the
learning curve of any new skills. Mr. Risley has his long-term vision but the immediate impact
on the communities caused them to raise objections to the merger.
Projection of the acquisition of FPI by Clearwater
Now come to the discussion of what if the merger transaction had been successful. What are
the outcomes of the two companies?
The objective to merge the two companies, in my
opinion, is to offset risks, augment revenues and earnings. We are now in a health conscious
Page 21 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
society especially in the North America where fish is considered to be a prime health food.
Therefore, diversification into the fishery products is an effective strategy and the merger
would assist the innovative value-added products by sharing the companies’ resources and
their markets. In fact, the average North Americans consume only 15 pounds of seafood a
year while Europeans consume four times that amount. The merge would have helped both
companies to complete in the world markets.
The merge would have also resulted in FPI buying Mr. Risley’s Clearwater for $510 million by
issuing 16 million non-voting shares and $100 million in preferred shares. Clearwater’s $210
million debt would also be assumed by FPI.
The merger would create Canada’s largest
seafood company with a estimated of $1 billion in sales. Clearwater would have gained more
cash flow and FPI would be modernized by Mr. Risley’s plant transformation plan.
Here is a quote from Canadian Business; Toronto; Feb 4, 2002 by Matthew McClearn:
<If Newfoundland's leaders wish to run a money-bleeding, woefully inefficient, make-work
project at taxpayer's expense, they never should have privatized FPI in the first place. >
The quotation has reflected the reaction of a business minded person.
The stock price
performance in the announcement of the merger has also demonstrated the positive move by
the eyes of the investors. The price has gone up from around $10.50 to a high of $11.50 per
share in September 2001. The price remained at the $10 level until the Clearwater announced
the withdrawal in February 2002. The stock price dropped to the $8 level.
Conclusion
This concludes the study of the proposed merger of Clearwater to FPI. The withdrawal of the
proposal in the midst of drafting this study has led to some changes in some thoughts and the
structure of this document. The merger would have been successful if more consideration had
been given to the communities involved, their traditions, potential job losses and past
experiences with the fishery industry. The interview last March with Mr. Risley by Jason Kirby
as reported in Canadian Business has indicated that Clearwater might become a public
company as FPI did in order to raise equity.
In the mean time, Clearwater will be
concentrating on improving its core operations. Mr. Risley also commented that his merger
proposal was meant to be in the best interest of the Newfoundland economy and depleted fish
Page 22 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
stocks. He also regretted that the Newfoundlanders have formed different opinions that were
distorted by the controversy of job layoffs. My final prediction for this saga is that the two
companies will be in a joint partnership relationship in the future. Mr. Risley will continue with
his venture by taking more calculated risks as he is called a “Gambler” in one of the Profit
Guide articles.
On May 28, 2002, The Halifax Daily News has already reported that
Clearwater was hoping to raise as much as $200 million to pay for planned acquisitions of
processing companies in the United States and Europe. This is the latest exploit of Mr. Risley
after the merger withdrawal of FPI and Clearwater.
Page 23 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
References
ABC Funds (2000), Value Investigator (June), Internet:
http://www.abcfunds.com/value/valuefavourites/fpl.shtml
Baird, Moira, Clearwater acting alone, says Risley, The Telegram (St. John's), March 28, 2001,
Final Edition, p.1 / FRONT
Bertin, Oliver, Canada’s seafood industry giants to merge, The Globe and Mail, Friday,
September 7, 2001, p. B3
Brent, Paul (2001), Shareholders in a fine kettle of fish, Financial Post (National Post), May 1,
2001 p. C2
Caldwell, Brad M. (2001), United Nations Fishing Agreement Review, (Dec 11), Internet:
http://www.admiraltylaw.com/fisheries/Papers/unclos.htm
Chidley, Joy (2002), Roger and Me, Canadian Business, Toronto (March 18), Vol. 75, Iss. 5;
pg. 60, 4 pgs
Cleary, Ryan, Taking over: FPI to swallow bigger fish in Clearwater, The Western Star (Corner
Brook), Friday, September 7, 2001, p. 1 / FRONT
DeMont, John (2001), Claws come out: two Atlantic seafood tycoons square off over control of
Newfoundland's biggest company, Maclean's, April 30 2001, vol 114 no 18, p 34,36
DFO Statistics (1999-2000), Domestic Imports / Exports of Selected Commodities,
(December), Internet:
http://www.dfo-mpo.gc.ca/communic/statistics/trade/trade2.htm
http://www.dfo-mpo.gc.ca/communic/statistics/trade/MMKT9900.htm
Editorial (2002), Risley plans to cast net for Clearwater investors, The Halifax Daily News,
Daily Edition, (May 28), p.23
Foot, Richard, Hearings about to begin into FPI's future: Emotional issue, Financial Post,
January 26, 2002, p FP5
FPI earnings stronger than expected, The National Post (March 22, 2001), J1 10’00 p. D2
Page 24 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
FPI Reported Revenue of $535M, Globe & Mail (1991), Toronto Metro edition, February 26, p.
B15
Faulkner, Robert, Seafood swallows rival, The Toronto Star, Friday, September 7, 2001, p.
BU03
Grimes, Roger, Newfoundland just doing what everyone else does, Financial Post, F 22 2002,
p. FP15
Guzzwell, Diane (2002), Administrative Assistant, FPI 2001 Annual Report (May 1), Internet:
http://www1.newswire.ca/releases/February2002/19/c3425.html
High Liner pulls in Q3 profit increase; FPI net lower despite gutted costs, Canadian Press
Newswire, O 30 2001
Hoare, Eva (2001), Clearwater, FPI merge; Risley in control, The Chronicle-Herald, Friday
September 7, 2001, p. A1
Kirby, Jason (2001), The rich 100 - in depth: a new sea-e-o, Canadian Business, Toronto
(December 31), Vol. 74, Iss. 24; pg. 95, 1 pg
Kirby, Jason (2002), The one that got away, Canadian Business, Toronto (March 18), Vol. 75,
Iss. 5; pg. 60, 4 pgs
Kirby, Michael JL (1982), Navigating Troubled Waters, December, [Canadian Govt Publishing
Press], p.3-6, p.201-205, p.222-231, p.238, p.303, p.328, p.336-343
McClearn, Matthew (2002), Time to cut bait? Canadian Business, Toronto, (February 4), Vol.
75, Iss. 2; pg. 17, 1 pgs
McLeod, John (2002), More than tradition at stake in Newfoundland, The Halifax Daily News,
Daily Edition (February 3), p.38
Minister Gerry Reid, All-Party Committee Review of FPI Act, January 28, 2002, Internet:
http://www.gov.nf.ca/fpiactconsultations/finalreport.htm
Minister Gerry Reid (2002), Letter to Mr. Derrick Rowe, News Release, Govt Nfld Labrador
(January 4, 2002)
Minister’s two-year moratorium on northern cod that resulted in layoffs of 31,000 employees,
Globe & Mail (1992), Toronto Metro edition, (July 3), p.B1, B4
Page 25 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
Newfoundland Economic Conditions (1992), Provincial Report, v. 27(1) March, 1992 p.16-20
MacDonald, Michael (2001), A shudder of fear rolled through Newfoundland on Tuesday,
Canadian Press Newswire, May 1, 2001
Meek, Jim (1999), The new Shell Game, Canadian Business (April 30), vol 72 no 8, p 50-2,54+
Moore, Charles, Grimes may have sealed fate of FPI, Atlantic Fisherman, April 2002
Pearson, Kali, (2000), The Gambler [Profit guide], Internet:
http://www.profitguide.com/inc/print_article.asp?ID=925
Roe, Eric (2002), Clearwater Fine Foods Inc backgrounder and Markets Distribution Charts for
1999 & 2000, e-mail (February 11)
Rowe, Derrick, President (2002), An Open Letter to All Shareholders of FPI, News Release,
Govt Nfld Labrador (May 1, 2001)
Rowe, Derrick, President (2002), Letter to Minister Gerry Reid, News Release, Govt Nfld
Labrador (May 9 & 18, 2001)
Rowe, Allan, CEO (2002), FPI Press Release (May 15), Internet:
http://www.fpil.com/currents/may16.htm
Rubin, Sandra (2001), Dissident shareholders win fight to control FPI: board ousted, Financial
Post, May 2, 2001, p. C1, C10
Stokes Sullivan, Deana (2002), Message is clear: Directors have lost credibility, St John's
Telegram (February 3), p. A4
The Canadian Awards for Business Excellence, Atlantic Provinces Economic Council
Newsletter (1991), v. 35(7) October/November, p.3
Tutton, Michael, Seafood combo: FPI, Clearwater Merge, The Montreal Gazette, Friday, 7
September 2001, p. C10
Unemployment rate of 18.9% in Newfoundland, Atlantic Report (1992), v. 27(1) March, p.16-20
Canadian Business (1999), (Apr 30), Vol 72 no 8 p 50-2
Page 26 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
Annex A
FPI 2000 / 2001 Financial Report
FPI Limited
Consolidated Balance Sheets ( courtesy from FPI customer service)
December 31,
December 31,
(Dollars in thousands)
2001
2000
(Unaudited)
(Audited)
-----------------------------------------------------------------------------------------------------------------ASSETS
Current Assets
Cash
1,577
221
Accounts receivable
80,047
76,043
Inventories
129,010
120,642
Prepaid expenses
4,340
6,693
Future income tax assets
2,114
860
-----------------------------------------------------------------------------------------------------------------Total current assets
217,088
204,459
Capital assets
Future income tax assets
Other assets
96,617
18,555
17,284
93,622
15,446
13,880
-----------------------------------------------------------------------------------------------------------------349,544
327,407
-----------------------------------------------------------------------------------------------------------------LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness
44,059
23,004
Accounts payable and accrued liabilities 45,935
37,122
Current portion of long-term debt
10,678
11,057
-----------------------------------------------------------------------------------------------------------------Total current liabilities
100,672
71,183
Long-term debt
55,821
62,275
-----------------------------------------------------------------------------------------------------------------156,493
133,458
-----------------------------------------------------------------------------------------------------------------Shareholders' equity
Share capital
Contributed surplus
51,174
71,642
48,053
73,064
Page 27 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
Retained earnings
67,229
70,965
Foreign currency translation adjustment
3,006
1,867
-----------------------------------------------------------------------------------------------------------------193,051
193,949
-----------------------------------------------------------------------------------------------------------------349,544
327,407
-----------------------------------------------------------------------------------------------------------------FPI Limited
Consolidated Statements
of Operations
Thirteen Weeks Ended Fifty-Two Weeks Ended
(unaudited)
(audited)
(dollars in thousands,
DEC. 31, DEC. 31, DEC. 31, DEC. 31,
except per share amounts)
2000
2000
2001
2000
-----------------------------------------------------------------------------------------------------------------SALES
191,309 187,758 703,115
723,153
Cost of goods sold
168,488 167,539 623,392
638,265
-----------------------------------------------------------------------------------------------------------------Gross Profit
22,821
20,219
79,723
84,888
Commission Income
698
756
2,988
3,271
-----------------------------------------------------------------------------------------------------------------23,519
20,975
82,711
88,159
Administrative and marketing
expenses
12,499
10,733
47,086
46,154
Depreciation and amortization
2,460
2,290
10,113
9,525
Provision for incentives and
profit sharing
502
602
1,800
2,570
-----------------------------------------------------------------------------------------------------------------Operating income before
the under noted
8,058
7,350
23,712
29,910
Interest
1,674
1,933
5,731
6,742
Unusual Items
1,868
14,543
0
-----------------------------------------------------------------------------------------------------------------Income before income taxes
4,516
5,417
3,438
23,168
Income taxes
2,657
2,244
4,445
9,615
-----------------------------------------------------------------------------------------------------------------NET INCOME (LOSS) FOR THE
PERIOD
1,859
3,173 (1,007)
13,553
-----------------------------------------------------------------------------------------------------------------EARNINGS (LOSS) PER
COMMON SHARE
Basic
Diluted
0.12
0.12
0.21
0.20
(0.07)
(0.07)
0.90
0.86
Page 28 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
Weighted average common
shares outstanding
(thousands)
Basic
Diluted
FPI Limited
Consolidated Statements
of Retained Earnings
15,383
15,395
Thirteen Weeks Ended
15,009
15,189
15,143
15,143
15,103
15,782
Fifty-Two Weeks Ended
(unaudited)
(audited)
DEC. 31, DEC. 31, DEC. 31, DEC. 31,
2001
2000
2001
2000
-----------------------------------------------------------------------------------------------------------------Retained earnings,
beginning of period
66,062
68,354
70,965
59,569
Net income (loss)
for the period
1,859
3,173
(1,007)
13,553
-----------------------------------------------------------------------------------------------------------------67,921
71,527
69,958 73,122
(dollars in thousands)
Dividends
692
562
2,729
2,157
-----------------------------------------------------------------------------------------------------------------Retained earnings,
end of period
67,229
70,965
67,229 70,965
-----------------------------------------------------------------------------------------------------------------FPI Limited
Consolidated Statements
of Cash Flows
Thirteen Weeks Ended Fifty-Two Weeks Ended
(unaudited)
(audited)
-----------------------------------------------------------------------------------------------------------------(dollars in thousands)
DEC. 31,
DEC. 31, DEC. 31, DEC. 31,
2001
2000
2001
2000
-----------------------------------------------------------------------------------------------------------------Operations
Net income (loss)
1,859
3,173 (1,007) 13,553
Add (deduct) items
not affecting cash
Depreciation and
amortization
2,460
2,290
10,113 9,525
Future income tax
(81)
818
(3,153) 2,581
Net loss on disposal
of capital assets
(3)
84
(39)
Provision for investment
in joint venture
2,329
0
Write-down of
capital assets
682
0
Page 29 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
-----------------------------------------------------------------------------------------------------------------Cash generated from operations
before the undernoted
4,235
6,281
9,048 25,620
Changes in non-cash working
capital balances
related to operations:
Accounts receivable
(6,507)
(3,013)
(3,224)
4,862
Inventory
19,308
46,992
(3,730)
1,410
Prepaid expenses
1,304
1,110
2,429 (1,053)
Accounts payable and
accrued liabilities
1,346
(6,402)
7,480
114
Foreign currency
translation adjustments
(1,922)
(387)
(3,442)
(903)
Accrued benefit asset
(698) (2,225)
(2,887) (2,121)
-----------------------------------------------------------------------------------------------------------------Cash provided by operating
activities
17,066
42,356
5,674 27,929
-----------------------------------------------------------------------------------------------------------------Investing
Additions to capital
assets
(5,413)
(1,845)
(14,874) (8,322)
Proceeds from disposal
of capital assets
0
11
1,100
Mortgages receivable
(82)
(643)
1,128
1,757
Other investing
activities
(355)
(364)
(1,928)
(464)
-----------------------------------------------------------------------------------------------------------------Cash applied to investing
activities
(5,850)
(2,852)
(15,663) (5,929)
-----------------------------------------------------------------------------------------------------------------Financing
Issue of long-term debt
3,063
10,000
3,063 10,000
Repayment of
long-term debt
(921) (1,133)
(11,359) (8,439)
Net change in
short-term bank loans
(12,070) (47,356)
20,018 (20,256)
Dividends paid
(692)
(562)
(2,729) (2,157)
Issue of common shares
236
40
3,934
1,131
Repurchase of
common shares
(1,045)
(2,235) (3,141)
-----------------------------------------------------------------------------------------------------------------Cash (applied to) provided
by financing activities
(10,384) (40,056)
10,692 (22,862)
-----------------------------------------------------------------------------------------------------------------Effect of exchange rate
changes on cash
189
(23)
653
167
-----------------------------------------------------------------------------------------------------------------Page 30 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
Change in cash position
during the period
1,021
(575)
1,356
(695)
Cash position,
beginning of period
556
796
221
916
-----------------------------------------------------------------------------------------------------------------CASH POSITION, END OF PERIOD
1,577
221
1,577
221
-----------------------------------------------------------------------------------------------------------------Supplemental cash flow information
-----------------------------------------------------------------------------------------------------------------(dollars in thousands)
-----------------------------------------------------------------------------------------------------------------Cash paid for:
Interest
1,411
1,672
6,226
7,439
Income taxes
1,511
2,369
6,634
7,279
------------------------------------------------------------------------------------------------------------------
Page 31 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
Annex B
Monthly Average of the Stock Prices
Date
1966-01
1996-02
1996-03
1996-04
1996-05
1996-06
1996-07
1996-08
1996-09
1996-10
1996-11
1996-12
1997-01
1997-02
1997-03
1997-04
1997-05
1997-06
1997-07
1997-08
1997-09
1997-10
1997-11
1997-12
1998-01
1998-02
1998-03
1998-04
1998-05
1998-06
1998-07
1998-08
1998-09
1998-10
1998-11
1998-12
1999-01
1999-02
1999-03
1999-04
1999-05
1999-06
1999-07
Price $
4.77
4.73
4.64
4.56
4.68
4.63
4.76
5.03
5.25
5.62
5.87
5.29
5.81
6.10
6.33
6.26
6.31
7.06
7.38
6.86
6.48
6.57
7.23
6.98
6.32
6.16
6.40
6.82
7.15
6.49
6.14
5.76
5.01
4.67
5.03
4.98
5.05
5.08
5.03
5.53
6.25
6.28
6.70
Page 32 of 33
CASE STUDY: Clearwater Fine Foods Recent Venture
1999-08
1999-09
1999-10
1999-11
1999-12
2000-01
2000-02
2000-03
2000-04
2000-05
2000-06
2000-07
2000-08
2000-09
2000-10
2000-11
2000-12
2001-01
2001-02
2001-03
2001-04
2001-05
2001-06
2001-07
2001-08
2001-09
2001-10
2001-11
2001-12
2002-01
2002-02
2002-03
2002-04
2002-05
2002-06
2002-07
2002-08
2002-09
2002-10
2002-11
2002-12
6.59
6.42
6.21
8.23
8.06
8.33
9.18
9.83
9.10
9.04
9.12
9.01
9.15
9.01
8.91
9.04
9.01
9.04
8.88
9.16
10.63
10.06
9.66
10.54
10.40
10.39
9.74
9.18
8.88
9.19
7.89
8.09
8.03
8.79
8.59
8.46
Page 33 of 33