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Price-fixing case among challenges facing UK salmon consolidation

The Scottish Salmon Company's hunt for new ownership comes amid fair trade scrutiny that includes an ongoing EU price-fixing investigation.

With regulatory scrutiny on collusive practices within the European Union, consolidation in the UK salmon farming industry will be under a microscope, a factor that winnows down potential suitors for The Scottish Salmon Company (SSC).

SSC announced in July that it was seeking a partial or full sale of the company, the result of majority shareholder SIX SIS's desire to divest.

SIX SIS, which is linked to Ukranian businessman Yuri Lopatinsky, owns just under 73 percent of SSC.

Its majority owner wants out, but who can buy The Scottish Salmon Company?

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The main question now is who can acquire the company without running afoul of competition concerns.

An analysis of key Scottish salmon farming companies last month showed concentration levels are high in the sector.

However, when asked about legal and regulatory limits to ownership consolidation in the area, the Scottish Salmon Producers' Organization told IntraFish they lack expertise in such topics.

One key player, however, is out of the running -- at least based on past precedent. However, other companies will not have the same limitations, DNB Analyst Alexander Aukner told IntraFish.

"Mowi is too big of a company, which was the case the last time they acquired a player in the United Kingdom, at least," Pareto Securities Analyst Carl-Emil Kjolas Johannesen told IntraFish. "It would surprise me if they were allowed to do so."

Back in 2013, Mowi had to divest 18,000 metric tons from its marine farming operations on the Shetlands and the Orkney Islands in order to get the approval to acquire the Polish fresh salmon processor Morpol.

"I would assume several salmon farmers are already looking into buying the Scottish Salmon Company," Aukner said. "It would be a new region without significant synergies so the most natural thing would be to expect the ones who already have operations there who might have the synergies discussed."

Scottish Sea Farms, Grieg Seafoods and Cooke Aquaculture - the other three major players in the area - could be potential buyers because they will not reach the size of Mowi in Scotland.

"They are not constrained by the market size of SSC but there are some geographical differences that need to be considered making some a better fit over others in terms of synergies," Sparebank 1 Markets Analyst Tore Tonseth told IntraFish.

Collusion complications

Earlier this year, inspectors from the European Commission Competition Authority (ECCA) raided offices of several farmed Atlantic salmon companies including Mowi, Grieg Seafood and Scottish Sea Farms, as part of an investigation into anti-competitive practices among the suppliers. SSC is not included in the ECCA's investigation.

3b5f76e674ab9622cfce61102cc4e2e1 SSC share movement over the past month. Photo: Bloomberg Markets

"The strange thing with this investigation by the European Union is SSC is not involved in it," Johannesen said. "The case only concerns Norwegian farmers, so it should not be an issue."

It might, however, make any attempts to consolidate the sector further from a trade perspective difficult.

Even though SSC is not part of the investigation, what could complicate the trade deal is if one of the potential buyers is part of the case, but it all depends on the outcome of the investigations, Sparebank 1 Market's Tonseth said.

Beyond the usual suspects

Existing salmon players are not the only potential buyers: alternative players are increasingly showing interest in the salmon farming sector, Johannesen said.

One example could be Asian conglomerates, especially with the latest case of Legend Holding's wholly-owned Joyvio's surprise acquisition of Chilean salmon producer Australis.

Other potential suitors could include Japanese giants, who have also been acquisitive in the salmon farming sector. Nippon Suisan Kaisha, Mitsui and Mitsubishi all hold significant interests in salmon farming. In addition, private equity funds have been carefully following the aquaculture boom, Johannesen said.

However, not all analysts agree on the point, despite the general agreement of increasing interest from both private equity and private capital.

"One of the industrial players will have the greatest benefit of acquiring SSC to get synergies on hatcheries and processing plants over other financial players," Sparebank 1 Market analyst said.

For many investors, the sector is ticking off all the right boxes because growth is intact and profitability is and will remain high over the next few year, however, this is a general trend, Tonseth said.

SSC said it expects its review of options to be completed by September. UK-registered DC Advisory is the boutique merger and acquisition firm running the sale process.

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