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  1. Analysis
September 25, 2014

Analysis: Does size matter in Thai Union Frozen’s growth plan?

Thai Union Frozen Products has rolled out an ambitious growth plan of hitting US$8bn in sales by 2020. The seafood group has embarked on what appears to be an acquisition spree - adding Norway-based King Oscar and French firm MerAlliance brands to its portfolio. It has also been linked with canned tuna supplier Bumble Bee Foods in the US. But with analysts concerned the two European buys are "insignificant" and Bumble Bee too risky, are these the right companies for TUF?

Thai Union Frozen Products has rolled out an ambitious growth plan of hitting US$8bn in sales by 2020. The seafood group has embarked on what appears to be an acquisition spree – adding Norway-based King Oscar and French firm MerAlliance brands to its portfolio. It has also been linked with canned tuna supplier Bumble Bee Foods in the US. But with analysts concerned the two European buys are “insignificant” and Bumble Bee too risky, are these the right companies for TUF?

Earlier this month, Asian seafood giant Thai Union Frozen Products announced two European acquisitions: MerAlliance and King Oscar, in part moves to strengthen its business in the region. But, according to Euromonitor’s latest data, the seafood sector in western Europe only grew 0.7% in the years 2012-2013, marginally up against the year before. In Europe as a whole, sales declined 0.1%. Hardly thrilling stuff – so what was the thinking behind the acquisition?

The first deal – for smoked salmon producer MerAlliance – was one that enhanced TUF’s in the salmon category. MerAlliance is an established player across Europe with a presence in France, the UK and Poland. At the time of sale, TUF was clear on why it wanted MerAlliance, pointing out the move was a “strategic” one since MerAlliance’s “leading” position in Europe would allow TUF to expand its base within the chilled category.

This month came a second deal, with TUF moving for Norway-based sardine and canned fish supplier King Oscar. Again, a major player in its respective categories, King Oscar produces and sells around 90m cans a year across 16 global markets. With an annual growth rate of 6%, TUF called King Oscar “one of the leading canned fish suppliers in Norway, the US, Poland, Belgium and even Australia. Again, the firm made a point of mentioning the contribution to strengthening “TUF’s brand presence” in Europe, specifically in Scandinavia and Poland.

However, industry watchers argue the contribution of the deals to TUF’s top line will be small. Prasit Sujiravorakul, analyst at Bualuang Securities, argues “brand growth” is behind the transactions. King Oscar alone is expected to only contribute to group revenues by 2%.

“The one thing it [TUF] is getting is the branding and exposure,” says Sujiravorakul. “The impact on TUF’s financial model is negligible, but I don’t think the company is thinking of that – rather … it is thinking of the premium brand it is acquiring”.

TUF – Sujiravorakul argues – can use King Oscar as a way to take some of its current brands into new markets. The TUF portfolio includes the John West brand in the UK and French brand Petit Navire. 

Conversely, the move also supports two local businesses, argues Natasha D’Costa, research manager for Frost & Sullivan’s food and ingredients pacific in Asia Pacific. She says many consumers are interested in keeping “local EU manufacturers in business” post-recession. 

TUF is getting exposure in markets in which it is not well known thanks to partnerships with local giants. This is a benefit that far outweighs the negatives of the size of the deals, which “in terms of contribution, are small,” adds Rattana Leenutaphong, analyst at IV Global Securities. In addition, TUF is able to grow in categories in which it has a small footprint: namely, salmon, sardine and mackerel.

However, there are still concerns in the among analysts regarding the size of the recent transactions. Presently, the Thai giant is hitting sales of US$3.66bn annually. It has outlined ambitious aims of reaching US$8bn in revenues by 2020 “if not before”. But the latest deals do not add much to the balance sheet. Speaking of the MerAlliance buy, Thiptawat Suwantammarong, analyst at Asia Plus Securities, said he had “only slight positive outlook” toward the deal, since its benefit will be “insignificant” to TUF’s profit forecasts in 2014-16 and the value of the deal is…only 2% of total assets.

On the other hand, TUF is “confident” it will hit its revenue targets. At the time of the MerAlliance buy, TUF CEO Thiraphong Chansiri said the acquisition was the first in the group’s strategy to “look for hidden pearls” within each of its business categories “that can strengthen our position and act as platforms for growth”. He added that, even after the King Oscar acquisition, the firm’s net-debt-to-equity ratio of 0.8x “is still in a comfortable range”. 

“Our calculated direction for growth within the group’s six strategic business categories has become even stronger and more prevalent with this world-class brand acquisition. In addition to organic growth, mergers and acquisitions will continue to be the company’s key strategy for business expansion in both short and long term,” he asserted.

Recently, TUF has been linked to a potentially bigger deal – that of Bumble Bee Foods, a significant name in the US canned tuna industry. Reports last month suggested TUF was “interested” in submitting a bid.

It would not be TUF’s first move in the US. In 1997, it acquired Tri-Union Seafoods, also known as Chicken of the Sea, which it still owns today. In 2003, TUF acquired Empress to improve distribution in the US and in 2010, the firm set up its first pet food venture in the country.

D’Costa believes the US has “scope for further penetration” and says Bumble Bee would be a “natural fit” for TUF. However, Sujiravorakul questions what the deal could actually bring to the table. It doesn’t bring them “premium” branding, he says, and competition in the sector is already fierce.

“In the US it is very difficult to gain market share,” he starts, adding that if the company is hoping the transaction will go as smoothly as Empress did in 2003, they are mistaken. “Pricing competition is heating up compared to then.”

Bumble Bee is the number two player in the US, meaning TUF would become the largest supplier in the market. However, Sujiravorakul points out there would still be stiff competition from the current number one player – Starkist.

“They need to think hard about this. Since the firm [Starkist] was acquired by Koreans [South Korean food group Dongwon Enterprise Co. bought Starkist in 2008], they play hard on price. It is very difficult to compete on price,” he warns. 

The question, Sujiravorakul says, is what TUF would hope to gain from the deal. The MW Brands acquisition in Europe in 2010 – a worthy deal in the analyst’s opinion – allowed TUF access to a premium brand in a market where revenue growth is “steady”. In comparison, Sujiravorakul argues, a takeover of Bumble Bee would not ease competition, and the lower margin it would provide “should be taken into account” should the Thai group be mulling a move.

The expectation is the Bumble Bee transaction would be costly. Dome Kunprayoonsawad, analyst at Country Group Securities, says TUF would have to raise capital to bid for Bumble Bee. In addition, the chances of the deal gaining competition authority approval would be slim as it would give TUF more than a 50% market share in the US.

While, broadly, analysts feel an acquisition of Bumble Bee would carry risks, they still believe TUF needs to look to takeovers to grow and meet its sales target. “M&A is the solution,” says Sujiravorakul.

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