Korea's Dongwon buys Starkist business

An established regional player in tuna and canned foods, Dongwon spends $363 million to buy Starkist and expand its business to North America.
South KoreaÆs Dongwon Enterprise will spend $363 million to acquire the Starkist seafood brand and related manufacturing from Del Monte Foods, USA.

Del Monte is selling its manufacturing capabilities in American Samoa, Manta (Ecudaor) and certain manufacturing assets in Terminal Island, California and Guayaquil, Ecuador. Dongwon will take over all plant employees plus 34 other salaried positions. It will enter a two-year operating services agreement with Del Monte whereby the US company will provide operational services such as warehousing, distribution, transportation, sales, information technology and administration for Dongwon during a transition period.

Del Monte said the sale price is a multiple of six to seven times the average trailing three-year contributed Ebitda of the seafood business. But profits of the business have been falling, so the deal has likely been transacted at a higher multiple of most recent Ebitda. Analysts estimate the business had fiscal 2008 revenues of around $560 million. At $363 million, the deal is being transacted at an equity value to sales multiple of around 0.65 times.

Dongwon Enterprise is a holding company with interests in 17 companies. The group has four decades of experience in the tuna business and is a leading player in canned foods in the Asia-Pacific region. Dongwon Industries has a 28% market share in Korea among fish suppliers, while Dongwon F&B is a dominant player in tuna with a domestic market share of 75%.

Starkist is a 65-year old brand with a 36% market share in shelf stable tuna in the US and 84% of pouched tuna sales. Del Monte acquired the business from Heinz in 2002 along with HeinzÆs US and Canadian pet food and pet snacks and other businesses.

Del MonteÆs tuna business competes with both branded and private label products. Branded sales dominate with private label accounting for only 17% of sales in fiscal 2008. Around one-third of tuna case sales are chunk light and albacore halves tuna in cans but Del Monte has been trying to shift the focus towards higher value-added products as it has been struggling to maintain profitability on various product lines in an environment where input costs are rising rapidly.

Starkist seafood specifically has been hard hit as sales have been lower due to lower chunk light halves sales and costs have risen significantly due to higher fish costs. Lower catch rates and higher fuel costs have exacerbated the problem. In an analyst call recently Del Monte management estimated that ingredient cost increases this year would be 17% versus last year, translating to a $45 million raw product increase for fish specifically. But Del MonteÆs ability to pass on the inflation in terms of price increases to customers has been limited as canned tuna is widely considered a cheap commodity.

Del Monte has been taking steps to address the situation. In its most recent analyst briefing Del Monte management mentioned that the seafood business had a positive year-on-year growth for the first time in six consecutive quarters, driven by strong performance in value-added pouch and specialty sales. But, simultaneously, it appointed Merrill Lynch in November 2007 to run an auction for the business, in which Dongwon emerged as the winner.

DongwonÆs ability to bid aggressively for the business would have been helped by its established presence in the tuna business which positions it well to manage the price volatility, say sources close to the deal, adding that Dongwon expects the deal, which will close by September 2008, to be earnings accretive in 2009 itself.

The deal follows only days after Korean confectionery company Lotte spent $164 million to buy Belgian chocolate maker Guylian.

"What this shows is the increasing ambition and firepower of Asian corporates,ö says Joseph Gallagher, head of mergers and acquisition Asia-Pacific at Credit Suisse, advisers to Dongwon. ôTwo years ago you would not have see Asian corporates walk away from an auction like this as the winner."
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