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.
Conclusion:
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.