Sources: More Icelandic quota consolidation likely with rising currency, cost pressures

A difficult year for Iceland’s fishing companies – especially the smaller and some medium-sized ones – has sources suggesting there may be a push on quota consolidation coming.

2017 so far has been labeled a “disaster” by one source, with first the fishermen’s strike, then difficulties in exports stemming from Iceland’s currency making life expensive. Most recently, fishing companies found out they would be required to pay drastically higher fees for the 2017-2018 season; in some case quadruple what they had paid in 2016. 

“This [fee hike] should have been known,” one source, an executive with an exporting company (source A), told Undercurrent News. “It’s based on the results of fishing companies from two years previously, and they all did extremely well in 2015, hence the increase now.”

“Maybe it comes as a slight surprise, just how high the increase is. It does hit small and medium sized companies badly, those maybe not as financially strong as the biggest.”

Increased fees will represent another blow for firms which struggled the most after the fishermen’s strike, which ran for 67 days until mid-February 2017.

In the aftermath certain species and product forms dived in price on a sudden availability surge. However, what hurt the most – according to various sources – was the strong Icelandic krona driving up costs.

“For exports from Iceland, currency is the critical issue at the moment,” said Marko Partners’ Jon Steffanson earlier in 2017. “The impact is that for companies selling overseas, costs are increasing significantly. The strengthening ISK is likely impacting earnings, as most exporters earn in euros or dollars.”

At that time the ISK stood at 113.10 per euro; as of July 26, 2017 the situation is worse, at 123.39.

“It comes down to how good your financing is,” source A told Undercurrent. “You don’t even necessarily need to be in bad shape; if a company did okay last year, and sees currency now 30% stronger than in 2015 – 40% when you compare to the [UK] pound [sterling] – when they look at expectations for this year, with the same quota, I think they would consider selling that quota and leaving the business.”

Perfect storm

Several sources felt the fishing fees would not prompt a “rush” on quota consolidation, but that the trend of gradual consolidation would not stop in 2017 either.

“I don’t see any big changes this year, just a gradual continuation of that trend,” said source B, an Icelandic banker.

“It would not surprise me if further consolidation is ahead in the Icelandic seafood industry, but at this time I believe it is premature to put that solely in the context of the fishing fees,” said another source, an executive on the technical side of the industry in Iceland.

“I generally agree that there is a sense of that direction, but on the other hand, there is really nothing new in that. It’s something that has been, and likely will be, going on for a long time now.”

However, several others felt 2017 was seeing something of a perfect storm of conditions pushing fishing companies to sell out of the business.

“From 2008 to 2015 there were some very good years for fishing, but domestic costs have been rising for two or three years now. Salaries, equipment costs, it’s all starting to add up and squeeze,” said source C – an executive familiar with both fishing and political hierarchies in Iceland.

Source D – a senior executive with a large Icelandic supplier – told Undercurrent he felt consolidation would continue, and the likelihood was that the pace would pick up in 2017. “I think the temptation is there [for potential sellers] to get the money out now,” he said.

“The mood has changed in Iceland in the past two or three years – it’s not such an easy sector to make money in now.”

And one source involved in seafood M&A (source E) said he had been approached already over the buying and selling of quotas this year. “Many companies have invested in a new fleet, heavily, so total enterprise value is coming up, but earnings are going down.”

“Ogurvik selling to Brim [Seafood] for around $100m is a good example of what smaller fishing companies face now; continue just about breaking even, or take that exit – who wouldn’t take that?”

Ogurvik selling to Brim [Seafood] for around $100m is a good example of what smaller fishing companies face now; continue just about breaking even, or take that exit – who wouldn’t take that?

Fee relief?

Sources A and C told Undercurrent there is some hope the government will consider concessions to certain fishing companies.

“The MPs see it’s tough, and it’s very political – the companies that might struggle, and need to sell, are often in the smallest villages. There is still pressure to protect them.”

Parliament next convenes in September, source C said, and he expects to see at least discussions over discounts of some kind.

The aforementioned exporting source, source A, said he did not expect to see discounts, but a restructuring of how certain companies might pay their fees.

“Next year the fees will be down, as 2016 was not such a good year for them, and in 2019 they’ll be down again, as 2017 is going badly,” he noted. “Maybe it might be fair to spread the fees they pay over this period.”

‘Tier two’ buyers

Quota consolidation has been a feature of Iceland’s fisheries sector since the late 1980s, when the government introduced individual transferable quotas (ITQs) across all species. This allowed some companies to buy up quotas from others, and catch them in a way which (theoretically) ought to be more efficient.

For vessels operating under the regular quota system, one company’s combined share in all fisheries may not exceed 12% in cod equivalents.

Source A suggested Iceland’s two ‘top tier’ companies were too close to this ceiling to be able to buy more quota.

“HB Grandi can’t buy any more, it’s at its top limit. When it comes to Samherji there’s some debate, as it has various holdings and stakes in other firms,” he said.

This leaves several ‘tier two’ companies – some of which have been snapping up quotas in recent years – which are perhaps the likely candidates to acquire more.

“There are companies that have been growing, and those are the ones you expect could be potential buyers. The whole [ITQ] system pushes towards consolidation, and this year as well you see new vessels arriving, which were ordered during the successes of 2015.”

These generally can catch more fish with greater efficiency, so allowing for quota investment, he suggested. He noted that Hofn-based Skinney-Thinganes has been growing in recent years, while some quota transfers have taken place in the Westmann Islands.

“The key is, which of these second-tier companies have access to funding. Quotas are not cheap.” Two other sources agreed that the price quotas go at will be interesting to watch.

“You look at the quota value versus the fish price, especially if it’s sold to the UK; there’s an imbalance. If the bigger companies want to buy quota, the question is, what are they willing to pay?”

Who’s in the running?

Several of the sources Undercurrent spoke with agreed that the most likely companies to buy up quotas this year would be those active in both pelagics and whitefish, as these were the most financially stable, and flexible, companies.

Fiskistofa’s table, showing company name, quota in metric tons of cod equivalent, and percentage holding of total

A list of Icelandic quota holders (right), compiled by Fiskistofa in March, gives an idea of who these ‘tier two’ companies might be.

It shows HB Grandi currently holds 11.32% of total cod equivalent quotas (at 49,342 metric tons), so could only add a very small amount before hitting the 12% ceiling, barring the sale of something first.

However according to this government list, second-largest firm Samherji holds just 6.52% (or 28,421t); its 44% stake in Sildarvinnslan (SVN) does not count under its own quota holding, it seems, though one source said the government watches how its holdings add up.

SVN is the third-largest Iceland firm, going by cod equivalent quota holding, with 22,771t (5.23% of the quotas). It has been fairly aggressive in acquisitions in the past few years, most notably in 2014 when it bought fishing firm Gullberg; processing facilities from Brimberg; and quotas from Stalskip.

Before that, in 2012, it picked up around 5,000t of quota when it acquired Westmann Islands-based Bergur-Huginn; roughly doubling its whitefish quota.

It also ticks the box for being active in both whitefish and pelagics. In 2017 it has begun overhauling its whitefish fleet, selling one vessel to Iran, one to Russia, and seeking to replace two more, so that it will own four newly-built vessels.

Despite these signs, managing director Gunnthor Ingvason told Undercurrent the firm was not actively seeking quota investments at this time.

Vinnslustodin (VSV), based in the Westmann Islands, is another firm active in both fish types. It holds 4.69% of the total quotas at present, though as of September 2017 this should rise slightly, as the company has just announced the acquisition of fellow Westmann Islands company Utgerdarfelagid Glofaxa.

VSV's Runar Bogason and the Breki

VSV’s Runar Bogason and the Breki

Though several sources described VSV as being a potential buyer still, managing director Sigurgeir Kristgeirsson told Undercurrent that after this deal, he does not see the firm “being on the buying side” again in the near future.

Thorbjorn, which trades as Thorfish, also holds 4.69% of the cod equivalent quota.

In terms of capital, it seems to have links to private equity Akur, with which it owns a stake in Steinasalir, the entity used to buy Icelandic Gadus earlier in 2017. Other Steinasalir shareholders include suppliers Saemark and Fishproducts Iceland, and fishing firms Brim, Hradfrystihus Hellissands, Kambur, KG fiskverkun and Oddi. 

Steinasalir was also in the running for Tesco whitefish and salmon supplier Icelandic Seachill, a former sister company of Gadus. However, Undercurrent reported on Tuesday that Steinasalir had pulled its bid, with Seachill’s investor owner going exclusive with another firm. 

Gunnar Tomasson – who runs the company with his brother Eirikur – told Undercurrent the firm has not been actively looking to add to quota, but would be open if a good opportunity came up. “Mostly, though, we are not interested in investing in quota at the moment,” he said.

Fisk Seafood has also been investing relatively recently – like Thorbjorn, downstream rather than upstream. It was part of Solo Seafood, the entity which Fisk and fellow fishing firms Jakob Valgeir and Nesfiskur used to acquire Icelandic Iberica from Icelandic Group at the end of 2016.

Source A suggested that such deals are not necessarily indicative of a desire to grow, but more an intention to “hold onto, and hopefully increase, markets. What’s being bought is the channel to the consumer, as assurance that investors from other countries don’t buy them processors and secure that route to market for fish from other origins”. 

Fisk holds 4.27% of the quotas, or 18,618t – like Thorbjorn, all in whitefish rather than pelagics.

Slightly larger is east-coast based Skinney-Thinganes, identified by several sources as a possible quota consolidator, given its strength in both pelagics and whitefish.

In 1999 it took over nearby firm Borgey – then one of the largest in Iceland – as the latter was on the verge of collapse. The newly merged entity “has concentrated on renewing its fishing fleet and increasing its fishing quotas in order to strengthen the basis of its operations”, according to its website.

75% drop in capelin drives Icelandic landings down

Skinney-Thinganes’ pelagic vessel Jona Edvalds. Credit: Neil Ramsden, Undercurrent News

“This has accomplished this by, among other things, collaborating with, or taking over, other fishing companies, and by investing in newly built vessels.” Most recently it has branched out into fishmeal, by purchasing a local factory in 2007.

Managing director Adalsteinn Ingolfsson told Undercurrent he was unsure even of how quota prices looked currently, in terms of value for money, as his company had not been looking to buy.

Isfelag Vestmannaeyja holds 4.4% of Iceland’s quota in cod equivalents, across whitefish and pelagics. Though it is based in the Westmann Islands – where two of its plants are based – it also owns two factories on the north coast of Iceland, so is diversified in terms of where it could land quotas.

According to the company’s website there have been talks of a merger between Isfelag and VSV several times, in the 1990s and early 2000s, though nothing came of these.

One or two companies holding smaller shares of the quota may be worth noting too.

Brim holds a 3.64% share of total quotas, reaching this total with the substantial purchase in 2016 of fishing company Ogurvik.

This granted Brim the vessel Vigri RE-71, and roughly 10,000t of quota; prior to the deal, the buyer’s three freezer trawlers caught roughly 24,000t.

Brim's vessel Vigri, acquired along with the company Ogurvik

Brim’s vessel Vigri, acquired along with the company Ogurvik. Credit: Brim

In a statement on the purchase, Brim CEO Gudmundur Kristjansson said “it has been shown that with larger units, Icelandic fisheries companies will be more powerful”.

“This is especially true in foreign markets, as the Icelandic fisheries industry is in severe competition for the sale of the products. It should not be overlooked that our performance largely depends on this.”

The price was not disclosed, but an Undercurrent source estimated it at around ISK 10-12 billion ($94.3 million-$113m at current exchange rates). “This is a good example of what smaller fishing companies face now; continue just about breaking even, or take that exit – who wouldn’t take that?”

Quota prices remain “extremely high” now, he said. He also questioned whether Brim would be looking to buy more quota at this time, though, suggesting it was highly leveraged with debt at present.

Last is Eskja, which currently holds only 2.49% of total cod equivalent quotas, largely in pelagics (averaging around 73,000t of peagics quota over the past five years). It has been working on converting its production from fishmeal to shore-based freezing for human consumption in the past few years, and took delivery of a vessel from Shetland in July 2017. This replaced an older vessel.

At the end of 2016 Eskja also bought the fishing vessel Libas from Norway’s Liegruppen, which described the vessel as “one of the largest fishing boats in Norway”, a combined purse seiner and trawler. The company has just opened a new 7,000 square meter facility in Eskifjordur.

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