Marine Harvest announced on Tuesday evening that it is making an offer of NOK 105 per share of Cermaq. The combination of Cermaq and Marine Harvest will create a global seafood leader with an integrated value chain from feed to retail sales.
The announcement doesn't come as a total surprise. In our Flash Note of 26 February we already pointed the following: "On 12 December, the Norwegian Ministries of Fisheries and Coastal Affairs proposed a change in the rules relating to ownership in the salmon farming industry. In the past, salmon farmers could not own more than 25% of Norway's production capacity. This ceiling has been increased to 40%. Marine Harvest currently controls about 22% of the country's production. We anticipate that the relaxation of the ceiling will trigger a new consolidation wave. Smaller players including Grieg Seafood and Norway Royal Salmon could become take-over targets for Marine Harvest. A merger with Cermaq is also feasible because Cermaq and MH’s combined Norwegian salmon production capacity is estimated at about 30% of Norway's total production capacity. Cermaq is not only a leading salmon farming company, but it also has a 36% share in the global salmonid feed sector through its subsidiary EWOS."
Marine Harvest is a major client of Nutreco. In 2012 Marine Harvest made up about 6% of Nutreco's group sales. Last year Nutreco produced 1.74 million tonnes fish feed of which about 300,000 tonnes or 17% was sold to MH. Marine Harvest is currently building a 220,000 salmonid feed plant in Norway which should be operational mid-2014. With the acquisition of Cermaq, Marine Harvest will become a leading salmonid feed producer.
Nutreco has recently signed a new contract with Marine Harvest as the existing one matures mid-2013. The new contract covers 2 years. During the first year, Nutreco is supposed to satisfy 2/3 of MH's global feed needs. In the second year, this ratio is set to decline as MH's feed plant comes on stream mid-2014. Will the new contract between Nutreco and Marine Harvest be cancelled? We await feedback from Nutreco's IR.
We lower our rating from Accumulate to Hold and maintain our target price of € 71. One should not overdramatize the news however:
1) Marine Harvest was already integrating vertically through the construction of its own fish feed plant.
2) We estimate that Marine Harvest makes up about 5-6% of Nutreco's total REBITA. A negative share price reaction in excess of 5% is therefore excessive.
3) Nutreco has been speeding up diversification into non-salmonid feed. Ambition 2016 includes the goal to increase fish feed volumes from 1.3 million tonnes in 2010 to 2.7m tonnes with a 45% share from non-salmonid feed. In 2012, Nutreco sold 1.74 milliontonnes fish feed, of which 34% feed for non-salmonid species. If Gisis had been included in 2012, non-salmonid feed would have made up 42% of Nutreco's fish feed volumes.