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Company in focus: Thai Union resumes takeover push after supply chain reforms

BANGKOKThai Union Group, the world's largest canned tuna company, has resumed its acquisition spree in developed countries just days after the U.S. government upgraded Thailand's status on human trafficking in its closely watched annual report.

On July 5, Thai Union announced the acquisition of Les Pecheries de Chez Nous, a Canadian lobster processing company based in New Brunswick. It was Thai Union's first acquisition in North America since it was forced to scrap a $1.5 billion buyout plan for Bumble Bee Foods in December. The much smaller Canadian company has annual revenue of 50 million Canadian dollars ($38 million).

The deal came five days after the U.S. government released its Trafficking in Persons report. After being downgraded to the lowest tier three in 2014 -- which put it alongside countries like North Korea and Syria -- Thailand was promoted one notch to the tier two watch list in the most recent report.

Migrant workers from Myanmar gather in Samut Sakhon near Bangkok, a center for seafood processing. (Photo by Keiichiro Asahara)

Thailand's poor showing in the trafficking league table cast a shadow over Thai Union's growth and sustainability prospects. The company is seen by many as representative of the entire local fishing industry.

TIP tier three countries are not automatically subject to trade sanctions, and the U.S. government has yet to directly penalize problem countries. Thai Union has come under pressure, however, from human rights groups and and nongovernmental organizations, mostly in the West.

Greenpeace, an environmental pressure group, launched a campaign in October 2015 calling on Thai Union to take "urgent and far-reaching steps" to eliminate labor abuse. It urged consumers and investors around the globe to boycott the company's canned tuna, and some retailers in the U.S. have responded.

Meanwhile, the European Union issued a yellow card to Thailand last year over illegal, unreported and unregulated fishing. The EU, which accounts for about 30% of Thai Union's total revenue, threatened to ban seafood imports from Thailand if it sees no progress.

Thai Union implemented a traceability program in 2014 to ensure vessels supplying it complied with labor regulations and delivered proper pay and benefits to employees. In 2015, the company issued directives on business ethics, including a code of conduct for labor.

The company said in March that it had terminated dealings with 17 suppliers in the previous 18 months for forced labor and human trafficking violations. It has also been more active in pursuing criminal charges.

The TIP's tier two watch list is for countries that fail to meet minimum standards on trafficking but which are making genuine efforts to improve. Thai Union's stock rose 0.9% to 22 baht on June 30 when Thailand's upgrade was announced.

"The upgrade is good for the whole food sector in Thailand because it can export more to the U.S.," Naree Apisawaittakan, an analyst at Phillip Securities (Thailand) told the Nikkei Asian Review. She cautioned, however, that the negative effect of the U.K.'s decision to leave the EU "offsets the positive impact of the upgrade." In the case of Thai Union, investor concern over Brexit hinges on the fact that about 30% of its total revenue comes from Europe.

The TIP upgrade puts Thai Union back on the M&A track. "The upgrade clearly helps the reputational factor when pursuing M&A activities, as it helps when the reputation of Thailand as a leader in seafood sustainability is recognized," Chief Financial Officer Joerg Ayrle told NAR. "It makes discussions easier and convinces partners of our direction and strategy. However, we remain committed to both the U.S. and Western Europe."

Thai Union announced its plan to acquire Bumble Bee in December 2014. In April 2015, CEO Thiraphong Chansiri said the Bumble Bee investment would greatly strengthen Thai Union's North American presence. He predicted it would help the company reach its sales targets of $6 billion in 2016 and $8 billion in 2020.

But the deal fell through in December 2015 after U.S. regulators raised antitrust concerns about the planned purchase. "Consumers are better off without this deal," the Department of Justice said in a statement. It pointed out that the acquisition would give Thai Union the second- and third-largest companies selling shelf-stable tuna in the U.S. -- a market long dominated by three major brands. Beyond monopoly worries, some analysts suspected human trafficking concerns played a part in the department's decision.

Thai Union's shares fell 2.6% on Dec. 4 following news that the deal was off, and they continued to decline as the impact on the company's growth prospects became clearer.

BUYING GROWTH Since starting out in 1977, aggressive acquisitions have been key to Thai Union's growth. Its revenue in 2015 was 127 billion baht ($3.93 billion) -- more than double the figure for 2005 -- and more than 90% of this was from outside of Thailand. Its flagship brands include John West, which has a 37% share of the U.K. canned seafood market, and Norway's King Oscar, which Thai Union acquired in 2014 and has a 79% share of the canned sardine market in the U.S., according to the company. Thai Union bought France's MW Brands in 2010 for $882 million.

Despite the Bumble Bee setback, Thai Union is sticking to its targets. "The management team and our CEO are committed to reach $8 billion by 2020," Ayrle said. "I am confident that we are on the path to achieve this goal and fulfill our objectives."

Thai Union's recent performance has been solid. It logged a net profit of 5.3 billion baht in 2015, a 4% rise on the year. The company's share price has been rising since January, and most analysts are predicting it to reach 23.5 to 25 baht.

With the Bumble Bee acquisition no longer in the cards, Ayrle said in May that the company is not looking for "very, very" large targets. "At this stage, I am doubtful that we are looking at acquisitions that large," he said. Outside North America, Thai Union has recently acquired a majority stake in Germany's Rugen Fisch, and a minority interest in India's Avanti Frozen Foods is pending.

According to QUICK-FactSet, Thai Union had 2.82 billion baht in cash and equivalents at the end of 2015, an increase of 33% from a year before, with free cash flow of 10.86 billion baht for the year.

The purchase of Les Pecheries de Chez Nous could be indicative of things to come. "If there are targets which fit Thai Union, we do try to look at them," Ayrle said in early July. "Our key focus remains Eastern Europe, emerging markets and countries and businesses where we do not hold a strong market presence, along with some Asian and Latin American markets."

Thai Union's acquisition-fueled growth strategy is well-timed, given the expected rise in seafood demand as the global population rises. The United Nations' Food and Agriculture Organization projects world fishery production will increase 17% by 2025 compared to the average for 2013 to 2015, which would leave plenty of room for Thai Union to grow.

On the production side, environmental and human rights issues will likely mean more companies coming up for sale. Western players, turned off by these risks, are pulling out of the sector. Thai Union and Norway's Marine Harvest are seen as the leaders in international consolidation of the industry. In the last five years, they announced 14 and 9 acquisitions, respectively, according to QUICK-FactSet.

KEEP SWIMMING Thai Union's dominant position has inevitably attracted the attention of Western governments and activists, particularly when the company's supply chain failed to stand up to scrutiny of its labor and human rights conditions.

In its Modern Slavery Act Transparency Statement 2016, Thai Union acknowledged the risks inherent in the business. The company sources its six main seafood categories -- cephalopods (octopus and squid), mackerel, salmon, sardine, shrimp and tuna -- from both the wild and aquaculture operations. The entire industry is labor intensive and susceptible to abuse, particularly because of its long and complex supply chains.

Despite the encouraging noises from the U.S., there are still plenty of critics. Sam Zarifi, Asia-Pacific director at the International Commission of Jurists, told NAR: "Recent media reports show that there are still real problems with slave-like practices and human trafficking in the fishing industry, where Thai Union and its suppliers are major players. We can expect that pressure on the company will continue, directly and indirectly through pressure on its clients like Walmart."

"The [TIP] upgrade gives it some space to show that it can and will clean up," Zarifi said, noting that the ICJ itself does not monitor companies for their labor practices.

On June 24, just days before the TIP report was released, Greenpeace posted on its blog: "This year we went to the Indian Ocean to peacefully tackle unsustainable fishing by the world's largest tuna company, Thai Union. ... Thai Union's destructive fishing methods contribute to overfishing and harm a range of marine life."

Thiraphong told the Bangkok Post in May that once Thai Union achieves its revenue target of $8 billion by 2020, the next goal will be for the company to survive for a century.

Thai Union knows sustainability is in question and that growth through acquisitions cannot continue indefinitely. In its annual report, the company said it wants to be known as "an organization with good corporate governance, integrity and accountability to all stakeholders, and to achieve sustainable business growth."

In July 2015, it hired Darian McBain as group director of sustainable development, reporting directly to the chief executive. So far, she has developed corporate social responsibility programs, including classes for teaching English to migrant children.

Just like tuna must keep swimming to survive, Thai Union will have to keep modernizing its management and improving its business practices to fend off competition and criticism.

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