Per Grieg’s huge deal in Newfoundland grilled: “Something smells fishy”

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Last winter, Grieg Seafood’s majority shareholder and chairman sold a Canadian salmon farming company to Grieg Seafood. Carnegie analyst says it was “value destructive”.

It’s a big deal. The Newfoundland project has a salmon farming area larger than the Faroe Islands, which consists of 11 sea sites and one RAS facility under construction. The project has a long-term harvest potential of 30-45,000 tonnes of salmon per-year.

Per Grieg Jr had been working on the project for five years. And last winter, what many had been waiting for happened: Grieg Seafood’s main shareholder and chairman sold his private salmon farming venture in Eastern Canada to listed Grieg Seafood.

On both sides of the table
The settlement for the trade was EUR 62.5 million, with EUR 26.5 million already invested in permits. When phase 2 is started, there is a potential for an additional settlement of EUR 85 million, depending on volumes achieved in the first ten years.

As Per Grieg sat on both sides of the table, as both buyer and seller, the valuation was very much an issue, both for the other shareholders and the investment banks who evaluated the deal.

One of those who warned Grieg investors about the deal was Carnegie analyst Lars Konrad Johnsen. In a thorough analysis, just in the wake of the transaction, Johnsen claimed that the acquisition was far too expensive. He was particularly concerned with the high multiples of EV/kg, i.e. enterprise value (market value of equity and net interest-bearing debt .ed) per-kilo of harvested fish:

“We believe the valuation is above what we argue is current market prices. Hence, we see the transaction as value destructive for GSF’s current shareholders. Specifically, we estimate EV/kg multiples (including the needed CAPEX to fully fund the smolt facility, site development, other infrastructure, and build-up of biomass) in the range of NOK 263/kg (on 15,000-tonnes harvested) to NOK 135/kg (on 45,000 tonnes harvested) on volumes that are 3-10 years out in time. Given the uncertainty of volumes in an undeveloped and historical challenging region with ongoing political/regulatory tensions (e.g. Prime Minister Trudeau’s election campaign calling for a ban of open net-pen farming in British Colombia and MOWI’s temporary suspension of ten licenses following a mass-mortality incident in the autumn of 2019), we see no valid arguments for the transaction value and the high up-front payment,” he wrote in an analysis.

“Our view is supported by implied EV/kg multiples for GSF’s business in Canada around NOK170/kg, MOWI’s Canadian business at EV/kg of NOK220/kg and MOWI’s acquisition of Northern Harvest on the East Coast of Canada in 2017 at EV/kg of c. NOK110/kg. Also, with an estimated needed CAPEX in the range of NOK 3.5 billion (EUR 320 million .ed) to NOK 4.5 billion (EUR 411 million .ed) to lift harvest volumes towards 33-45,000 tonnes, we see potential negative effect on balance sheet flexibility and dividends. At last, the suggested transactions with a company controlled by its main shareholder raises questions regarding corporate governance and aligned shareholder interests for the future. Hence, we do not rule out the potential for multiple contractions if the transaction is being pushed through by the main shareholder,” added Johnsen.

Fishy
Shortly after Johnsen downgraded his recommendation of Grieg Seafood to SELL, in a new analysis called “Something smells fishy”.

Grieg’s board of directors, of course, pushed through the transaction.

Read more: Grieg Seafood posts profit warning – may be in breach with loan agreements

Eight months later, the issue Johnsen raised has become a bleak reality for Grieg Seafood’s shareholders. The stock price has halved this year due to heavy losses, particularly in Scotland and Canada. And the pace of investment for the ambitious and capital-intensive project in Eastern Canada has been reduced.

It also turns out Grieg Seafood may have breached its loan terms. The company does not have the money to fund the project as it was originally planned.

Johnsen has not changed his view on the huge transaction in Canada.

Carnegie’s analyst Lars Konrad Johnsen (left) talking to portfolio manager Hogne Tyssøy of Holbergfondene. Photo: Aslak Berge

Negative value
“I still think there is a negative value to the plans they have for Grieg NF in terms of timeline, volume, and CAPEX/OPEX. So I had put everything on ice and tried to sell off the licenses and the smolt plant. And with the challenges around the existing business (Norway, UK, and Canada) plus a stretched balance sheet/liquidity, it would probably have helped the share price. However, it is hardly easy to sell those licenses “overnight” at a price close to invested capital in Grieg NF,” he told SalmonBusiness.

Would such a transaction have been able to occur in comparable companies, such as Mowi and SalMar?

“I think I should not answer the last question, as there would be an awful lot of speculation,” Johnsen said.

Professional
Per Grieg Jr. insisted that he has been concerned with the aforementioned issues in connection with the big deal.

Do you understand that pricing, conflicts of interest, and corporate governance are being questioned here?

“We have been aware of the related issues and have been keen to have a professional process in the transaction. Therefore, we had an independent board and third party assessment (Deloitte),” Grieg wrote in an email to SalmonBusiness.

“Otherwise, referring to the stock exchange announcement yesterday. Of course, supplementary comments will also be made at the quarterly presentation on 17 November,” he added.