Billion Dollar Deal … My Foote

A Look at the Proposed Clearwater Seafoods Deal

By: S.M. Thimmayya Mukkatira[1], Managing Member, SIFF Capital Management L.L.C.

Note: This post is provided by SIFF Capital Management L.L.C. (“SIFF”) strictly for information and discussion purposes. It is intended for dissemination by institutional and accredited investors, as well as sophisticated fisheries/seafood sector stakeholders including government, industry, Indigenous and ENGO leaders. This post is based on information and analysis that SIFF believes to be accurate but which SIFF has not independently verified and of which SIFF cannot assure the accuracy or completeness.  Forward looking statements made below are inherently uncertain and may differ from actual future events.  Nothing contained in this post should be relied upon alone or together as the principal basis for any decision making by any person or entity. This does not constitute investment advice or any form of offer or solicitation by any party in any jurisdiction.

This is a follow-on to my earlier Ship of Fools post to which readers may also refer.  

When I first read about the proposed deal to sell Clearwater Seafoods to Premium Brands, I immediately felt like my longtime friend Tim Foote (Managing Director, Head of Institutional Equity Trading, Coremark Securities Inc.) had to be involved in this, somehow.  

It has been my pleasure to know Tim as a personal friend since 1998 (Tim’s brother-in-law Mark is one of my best friends), and over the two decades since then.  It has been a pleasure to learn so much from him since the first time we met, and I consider him among the most capable people I know when it comes to understanding people within situations– how different people fit together, develop sentiments, how they make decisions and how deals come together.  

I knew for years that Coremark had served as financial advisor to Clearwater, and that Tim was extremely familiar with details of how prior deals involving Clearwater had come together. I don’t believe he was directly engaged with the Clearwater owners but I know of his direct engagement with the principal owner of Premium Brands, the proposed buyer of Clearwater to which Coremark presently serves as advisor with respect to the currently proposed transaction.

When I contacted Tim in the summer of 2019 to ask if we could present our SIFF strategy to Coremark for discussion, he made an introduction to the firm’s then investment banking head, Chris Shaw, who is now Coremark’s CEO.  I spoke with Chris over the phone, explained everything (SIFF background, people, proposed strategy, etc.), subsequent to which Chris (and Tim) kindly arranged for a room of senior Coremark executives (the senior-most being Peter A. Charton, Vice Chairman and Managing Director, Institutional Equity Sales) to attend my presentation while Dan Lane was present on the conference line.  The discussion was not only insightful and beneficial, but it was a real pleasure, as we all seemed to agree.

Tim could not join the meeting, but we met up later that day/evening and spent a few hours together.   Mostly just caught up on life but we definitely spent time on the SIFF topic, and both Clearwater and Premium Brands naturally came into the discussion.  I appreciated hearing Tim’s perspective, as opposed to the perspective of smaller processors in the Maritimes from which much of my perspective was drawn at the time.  I wish such discussions occurred more often … to bounce around thoughts and ideas with sophisticated capital market participants like Tim, Chris, Peter and their other esteemed colleagues at Coremark.

However, my biggest takeaway from our communications and face-to-face interactions was that *everybody* seemed to have fundamentally misunderstood how fisheries resources access and allocation works in Canada.  The perception was that by having the gall to issue an additional surf clam license, the Department of Fisheries and Oceans (“DFO”) had “screwed Clearwater”. Some national Canadian media outlets seemed to also advance the thinking that Clearwater had been exceptionally wronged. This notion will sound absurd to any person who understands the powers of the Minister of Fisheries (“Minister”) and the history (as much as we can know about it anyway) of how Ministerial Discretion was employed in the past.  This notion is not even a remotely accurate characterization of what actually transpired.

This is a clear aspect where the Ship of Fools post can be helpful in that it attempts to explain some of the dynamics around access and allocation and Ministerial Discretion.  That post also devotes considerable space to discussing abstraction and cartoonization, which in my view is entirely the realm where Tim Foote, Chris Shaw and the multitude of other sell-side professionals operate.  It is inevitably so, as I explain in Ship of Fools, and the important thing for maintaining larger system integrity is to ensure that the effect of cartoonization is not to omit facts that are potentially of material significance to investment decision makers.

In this post I will assume that Ministerial Discretion and considerations that go into access and allocation are understood by readers based on how they’re presented in Ship of Fools, and will focus here on Clearwater Seafoods proposed deal and the publicly known history leading up to it, as well as discuss Indigenous fishing access pursuant to the Marshall Decision to the extent that it helps achieve greater overall clarity in this post.

I. History and Value of Clearwater Shares

Some brief points are provided below for orientation purposes:

Clearwater resembles a private company far more than it does a public one. Following is its most recently published ownership table.

Figure 1. Ownership Table

The above presents a straightforward indication that Clearwater’s experienced founders John Risley and Colin MacDonald (with Mickey MacDonald included) still control the company.  Institutional ownership is now publicly indicated (www.cnbc.com) as a paltry 2%.

Next let’s look at Clearwater’s five-year share price performance, an indication of what the minority public investors think and perceive about Clearwater’s value.

Figure 2. Five-Year Chart

USD, Five-year historical share price performance, Clearwater Seafoods

The above chart shows the share price in US dollars, and there are (according to CNBC) 65.1 million shares outstanding.  The difference between this figure for total shares and the one presented in the ownership table presumably relates to convertible instruments outstanding including as part of employee compensation programs. I did not explore this point because it’s largely irrelevant here.

                  Hey Man, That’s Nacho Fish!!

On Figure 2 we can note the sharp decline of share price beginning at the point labelled “Surf Clam – New License Announced”.  This is when the Minister of Fisheries (“Minister”) decided that Clearwater’s monopoly on Canadian offshore surf clam fishing would end, and that a fourth license to harvest 8,900 tonnes would be issued.  Note the spikes in trading volumes as well.

The Minister further announced that the fourth license would be allocated to an Indigenous community-controlled fishing enterprise and that the allocation would be made pursuant to a public tender process.  Again, as highlighted in Ship of Fools, this is absolutely in line with the mandate and powers of the Minister.  At the time this occurred, Clearwater displayed public outrage, screaming bloody blue murder at what it claimed was an “expropriation” by the Minister.  In response, the Minister correctly stated publicly that “you cannot be expropriated from a property that you do not own.”, i.e., hey man, that’s nacho fish!!

Next, in February 2018 the Minister, pursuant to a public tender process, allocated the fourth license to Elsipogtog First Nation of New Brunswick and its five First Nation coalition partners joint-venturing together with Nova Scotia based Premium Seafoods Ltd.  Seafoodsource.com reported that Clearwater issued a press release announcing legal action to address what it considered “a failure in public policy and abuse of power by the Minister.”  This was mere trash talk from Clearwater because the Minister has absolute and unfettered discretion over access and allocation.  However, due to the untimely tragic death of Premium Seafoods Ltd. co-founder Brian Samson, the winning group could not successfully organize to fish the license and the Minister effectively withdrew the allocation decision.

The main point is that the only way that these decisions by the Minister could drive the price of Clearwater shares down so precipitously is if the market was [wrongly] under the impression that the monopoly was somehow the permanent property of Clearwater.  This was never the case and the market should never have held this belief in the first place.

Between July 2017 and February 2018 Clearwater’s share price dropped from ~$9.50 down to ~$3.75, corresponding to a drop in market capitalization from $618 million to $244 million, for a total market cap decline of $374 million.

                  Howzat?

Since the beginning of chatter in late summer leading to some well-publicized announcements from Clearwater and Membertou First Nation (“Membertou”), and particularly since the announcement of an agreement to sell the company to Premium Brands at ~ $6.25 per share, the share price has risen to reflect Premium’s offer price, signaling that the market believes the proposed deal will be consummated. 

Here again, it seems that the market may be working off an incomplete and weak understanding of some key factors relating to the proposed deal.

Following are two important questions to ask:

1. Why would Premium Brands extend an offer to acquire the shares at a 30% premium to the market, following a deal where Clearwater’s fishing licenses will all be held by Membertou?  I understand that Membertou will own half of Clearwater, and it still makes no sense to me due to point 2 below.

2. If the fishing licenses and quota represent valuable assets of Clearwater, then why is the company worth 30% more under a scenario where it no longer owns the licenses?

There appears to be a belief that transferring ownership of the licenses to a First Nation represents a brilliant tactical manoeuvre that achieves de facto permanent ownership of access, and that fetters the Minister’s options concerning access and allocation.  This is absolutely not the case and should not be understood this way by the investing public or for that matter by anybody.    It is in fact arguably a manoeuvre that attempts to tie the Minister’s hands with respect to Clearwater’s monopolies and to undermine the Minister’s authority.

Whether or not $6.25 per share is a high price or a low price or a fair price is not at all the point.  The point is that the market (and the media) seems to be assessing and valuing the proposed transaction based on potentially wrong understandings of important sector governance dynamics

In the end, if Premium Brands and its shareholders want to pay that price, then that price [at least at that moment] represents the market value.  A P/E ratio of 106 seems high to me for a company facing as much uncertainty regarding future cash flows as Clearwater and with as much debt as Clearwater … but whatever … every institutional investor should do their own homework and their own analysis and then bear the consequences without complaining.  The investing public is of course a different issue, and hopefully the right actions and procedures will always ensure that the investment public is protected and accurately informed.

II. Access and Allocation for Indigenous Canadians

The information in this section is provided for context to aid in the discussion that follows in

Canada’s fisheries began with the capture of fish for food and trade by Indigenous people.  The history of the French, British and Indigenous people in the Maritimes is deeply interesting and insightful on diverse levels and fronts.  The summary provided here does it no justice and is intended for providing better context.  I encourage all Canadians to research and learn more about the early history of what would eventually become Canada.

The first [documented and known] contact between European settlers and the ancestors of today’s Indigenous Canadians occurred the Bay of Fundy.  In his book, A History of the Saint John River, Rev. W.O. Raymond, LL.D., writes as follows:

The Basque, Breton and Norman fishermen are believed to have made their voyages as early as the year 1504 … But these early navigators were too intent upon their own immediate gain to think of much beside; they gave the world no intelligent account of the coasts they visited …

And regarding the legendary Chief Membertou:

The elder Membertou … the most remarkable chieftain Acadia ever produced. His sway as grand Sagamore of the Micmac nation extended from Gaspe to Cape Sable.  In the year 1534 he had welcomed the great explorer Jacques Cartier to the shores of Eastern New Brunswick, as 70 years later he welcomed de Monts and Poutrincourt to Port Royal.  The Jesuit missionary, Pierre Biard, describes Membertou as “the greatest most renowned and most formidable savage within the memory of man; of splendid physique … brave and reserved, with a proper sense of the dignity of his position as commander. In strength of mind, in the knowledge of war, in the number of his followers, in power and in renown of a glorious name among his countrymen and even his enemies, he easily surpassed the Sagamores (Chiefs) who had flourished during many preceding ages.

Raymond also notes:

The Micmacs seem to have permitted their neighbors to occupy the Saint John River without opposition, their own preference inclining them to live near the coast.  The opinion long prevailed in Acadia that the Maliseets were a more powerful and ferocious tribe than the Micmacs; nevertheless, there is no record or tradition of any conflict between them.”

The Maliseets frequently came to the mouth of the Saint John to trade with the French; sometimes they even resorted to Port Royal, for these daring savages did not fear to cross the Bay of Fundy in their fragile barks.”

And as follows:

The unfortunate conduct of some of the New England governors together with the other circumstances that need not here be mentioned, led the Maliseets to be hostile to the English.  Toward the French, however, they were from the very first disposed to be friendly, and when de Monts, Champlain and Poutrincourt arrived at the mouth of our noble [Saint John] river on the memorable 24th day of June, 1604, they found awaiting them the representatives of an aboriginal race of unknown antiquity, and of interesting language, traditions, customs, who welcomed them with outward manifestations of delight, and formed with them an alliance that remained unbroken throughout the prolonged struggle between the rival powers for supremacy of Acadia.

This last point is important.  Mi’Kmaq and Maliseet people enjoyed a friendly and mutually beneficial relationship with the French for roughly a century.  When the rent-seeking French colonizer Charles de Menou, Seigneur d’Aulnay Charnisay successfully looted Fort Latour in 1654 after numerous unsuccessful attempts:

the booty taken by Charnisay was valued at £10,000 sterling, and as it had been accumulated in traffic with the Indians, we may form some idea of the value of trade of the Saint John River at this time.”

Warring and the Peace and Friendship Treaties

The main incentive for the British entering into Peace and Friendship Treaties with the Mi’Kmaq, the Maliseet and Passamaquoddy among others likely was to cause a permanent severance of the friendship and alliance between the French and the Indigenous people.  While the British has successfully captured and held key posts including Port Royal and Halifax, their attacks were successfully repelled in most of Acadia and answered in kind with fierce attacks by French and Indigenous forces.

The first Peace and Friendship Treaties were signed in the early 1700’s with the 1725 Peace and Friendship Treaty recognized as the Crown’s first attempt to secure Peace and Friendship with the local Natives.  This peace did not hold, partly because the French responded by offering gifts and rewards to the Natives for their continued loyalty and friendship.

By the end of the Seven Years War in 1760, Indigenous leaders appeared to recognize that the British were likely to dominate their territory for a period that would span many generations, and genuinely sought to strike a deal with the British that would secure to the greatest extent possible a future where their descendants could live lives of freedom, peace and prosperity, supported by the hunting/gathering/trading mode of life that they had established with the French. 

By this point in history, Natives had already co-existed with European settlers for more than 150 years, and successive generations had grown up with comforts derived from European goods such as steel knives, axes, cooking pots, guns and gun powder, clothing, etc. Their existence was now inextricably intertwined with that of white settlers and they seem to have been most concerned with how this would affect their future generations.  As such, the Peace and Friendship Treaties secured their rights hunt, fish, fowl and forage on their traditional territories for cultural, subsistence and trade purposes. The Natives seemingly sought a peaceful co-existence and trade with British colonial society so long as their lands, cultural freedoms and their rights would be preserved for future generations.

Early on, things seem to have gone very badly for the Natives under British rule, with a sharp turn for the worse after 1867 under the Indian Act, which the Crown unilaterally decided would govern all aspects of the Indigenous peoples’ existence in Canada.  From the 19th century onward as they were dispossessed of their lands, herded and kept on reserves according to strict and oppressive regulations, denied their traditional lifestyle and forced to subsist on crown rationed foodstuffs, frequently charged criminally and jailed for hunting, fishing, and trade, frequently abused psychologically and physically within government and social institutions including schools, churches, hospitals, etc., and of course there is the history of residential schools which today is well-documented by Canada’s Truth and Reconciliation Commission’s final report.

The Marshall Decision

The Supreme Court of Canada’s Marshall Decision confirmed the Treaty Rights of the signatories of Peace and Friendship Treaties signed between 1760 – 1763 as well as a Royal Proclamation by the Crown issued to reaffirm treaty commitments.  The court held that signatories of the relevant treaties, including the Crown, Maliseet, Passamaquoddy and Mi’Kmaq, intended that the descendants of Indigenous people (beneficiaries) would hold rights to access resources for harvest and other activities that would enable them to trade with [white] British subjects in order to obtain necessities.  The court found sufficient evidence that the British also understood this to be part of their agreement in the Peace and Friendship treaties. 

The court also found that at the time the agreement was made, both sides believed that resources for hunting, fishing, fowling and gathering were inexhaustible and therefore the treaties contain no provision or consideration regarding conservation of resources.  The court expressed that this present-day dilemma should be resolved by way of negotiation between the Crown and Indigenous treaty beneficiaries, which we see occurring presently.  The Crown is permitted to regulate rights-based harvesting however it must justify any restrictive regulations (that could be seen to restrict the rights or the freedom to exercise them) on the basis of resource conservation.

III. Implementing the Marshall Decision and Reconciliation

There is a place for discussion and negotiation for those who want to move beyond silence. Dialogue and mutual adjustment are significant components of Mi’kmaq law. Elder Augustine suggested that other dimensions of human experience—our relationships with the earth and all living beings—are also relevant in working towards reconciliation. This profound insight is an Indigenous law, which could be applied more generally.

Mi’Kmaq Elder, Stephen Augustine

TRC Final Report Summary

Together, Canadians must do more than just talk about reconciliation; we must learn how to practise reconciliation in our everyday lives—within ourselves and our families, and in our communities, governments, places of worship, schools, and workplaces. To do so constructively, Canadians must remain committed to the ongoing work of establishing and maintaining respectful relationships.

TRC Final Report Summary

Note to All Canadians:  Reconciliation does not mean providing money and jobs to Indigenous Canadians, it means much more than that.  Reconciliation can only succeed if non-Indigenous and Indigenous Canadians mutually recognize and act on the need to improve their mutual understanding of the past and the present, and mutually agree on the future.  It should be an inclusive national exercise where *all* Canadians feel welcome and comfortable expressing their sentiments without fear of being misunderstood or castigated.  When a commercial transaction is referred to as Reconciliation it demeans the very concept that it claims to support and hinders real progress on real Reconciliation.

__________________________________________

Broadly speaking, there are two particular reasons/objectives regarding why the Minister is interested to provide more access and allocation to Indigenous communities and groups. 

  1. Implementation of the Crown’s response to the Marshall Decision
  2. Use of fisheries resources as a tool for advancing the mutual goals of the Crown and the Indigenous people, including but not limited to the goals of self-governance, self-determination and self-sufficiency.

The objectives stated above form important parts of the Minister’s role in ensuring long-term wealth maximization to Canada from our country’s ocean resources.  This includes Ministerial decisions that support equitable and merit-based access and allocation in a manner that helps to ensure a stable, vibrant and prosperous fishery for all participants, including both Indigenous and non-Indigenous harvesters and by extension including their respective communities.  The Minister is not responsible to advance the interests of specific companies or stakeholders, but rather it is to advance the interests of all deserving sector participants in a manner that serves the best interests of Canada.

Three tenets of this could include the following.

  1. Fisheries resources are finite.  Once allocations are made to one party the same resources cannot be allocated to second party without diluting or impairing the value of the allocation received by the first party.
  2. In the interests of long-term wealth maximization to Canada, conservation and protection of resources are of paramount importance.  The level of fishing pressure on any fish population should not be increased unless the Minister finds sufficient scientific evidence to show that such increase is consistent with the objective of long-term wealth maximization to Canada.
  3. Potential benefits of providing access and allocations to Indigenous stakeholders can be measured by the economic value and the personal utility that they generate for moderate livelihood harvesters. At a community level they can be tied to measurable plans for advancing to self-determination and achieving socioeconomic progress within Indigenous communities.  Maximization of these value components when evaluating proposals for Indigenous access and allocation will help to reduce the potential for adverse impacts on marine ecosystems and Indigenous/Canadian Coastal communities by making sure Canada obtains the greatest possible benefit for having extended the access to Indigenous communities and groups.

Ministerial Decision to end the Clearwater monopolies.

It appears that in 2016 the Minister adopted a philosophy and stance that would favor the inshore (“Artisanal”) fleets rather than the larger corporate offshore fleets (discussed at length in my Ship of Fools post), and this seems to have shattered a theretofore-dominant cartoon that Clearwater is so powerful that it practically controls Minister decision-making.  This was never true.

It is inescapable fact that the Crown will have to continue implementing the Marshall decision by negotiating and facilitating fisheries access to treaty beneficiary First Nations.  If fishing pressure is to be maintained at present levels, then new access must come from existing access, and the Minister appears to favor reduced fishing pressure in the offshore segment to increase it inshore, including both Indigenous and non-Indigenous communities and commercial harvesters. 

Based on this seeming truth, it appears that Clearwater sought to preempt any such dilution of its monopolies or any regulatory/policy changes that could reduce its access by entering into revenue-sharing agreements and controlling agreements with particular First Nations.  There is no indication that the Minister has accepted Clearwater’s unsolicited proposal for addressing its own monopoly power as sufficiently meeting the Minister’s preferences on access and allocation between offshore and Artisanal or between Indigenous and non-Indigenous-owed fishing enterprises. 

It is entirely possible that the Minister may still at any point decide it’s in the best interests of Canada and Canadians that a merit-based competitive tender process be adopted for additional offshore surf clam access.  This would provide an opportunity to ensure that Canada gets the most bang for its ocean wealth in terms of supporting Reconciliation objectives without any increase in fishing pressure.

The same holds true for offshore lobster quota as well, as it does for most commercially fished species, whether from established or emerging commercial fisheries such as redfish, whelk or sea cucumber.  All new access or allocation opportunities can be used to either promote progressive-minded new entrants to the Artisanal fleets, and/or to advance compliance with the Marshall ruling and/or to further reduce long term obligations of the Crown to Indigenous Canadians or to support Reconciliation. 

The most important considerations for the Minister seem to be:

  1. Value realization potential (see Tenet 3 above) of the proposed allocation
  2. Seeking the optimum allocation of access between Indigenous, non-Indigenous, offshore and Artisanal.

Consistent with the Ship of Fools post, my view is that the Artisanal fleets likely will not survive this decade without Ministerial support in policy, regulation and enforcement, which leads me to the view that the Minister should not waste a single access-granting opportunity on proposals that don’t advance the Minister’s objectives 1 and 2 suggested above in accordance with the three tenets suggested above.

In particular, consider the following:

  1. Once the Minister has decided to break up a monopoly through a merit-based public tender process, any subsequently received unsolicited proposals from the present owner of that monopoly cannot on its own eliminate the Minister’s perceived need or desire to take action regarding the offshore monopolies.  The acceptance of such a proposal without a public-tender or discussion process to confirm that it is in fact the best proposal available to Canada for utilization of the resource, would seem inappropriate. Particularly as Clearwater did not win the prior competitive tender, it seems illogical that its unsolicited proposal would be summarily accepted.
  2. No Nation Left Behind – Given the clear need to maximize value to Canada from any and all new access and allocation opportunities and given the existence of numerous treaty beneficiary Nations that Maliseet, Passamaquoddy and Mi’Kmaq, it would seem more equitable that all First Nations are given access to the opportunities rather than only those that managed to strike a deal with the existing monopoly holder through a closed-door private process.  The Minister and Crown are responsible to all First Nations and treaty beneficiaries and not only the ones that make deals with oligarchs.
  3. PIIFCAF – Issues surrounding PIIFCAF (covered in Ship of Fools) are relevant to any Indigenous access and allocation decisions.  None of the communal-commercial allocations made pursuant as part of DFO’s Marshall Response are subject to PIIFCAF, meaning that each such allocation shrank the pool of independent licenses available to potential new-entrants to inshore lobster, snow crab and/or other fisheries.  While the Crown cannot insist on Indigenous licenses submitting to PIIFCAF, it can offer incentives to Indigenous treaty beneficiaries that agree to adopt PIIFCAF.  Particularly under terms for a so called “moderate livelihood” fishery it seems like PIIFCAF compliance would be a welcome and natural fit for the licenses’ intended purpose.  Incorporating voluntary PIIFCAF adoption into negotiations of Indigenous allocations would help to offset the challenges faced by the non-Indigenous owner-operators and potentially yield a net benefit to the interests of Canada and Canadians.
  4. Long-Term Value of Allocations – Given Tenet 3 above, new access and allocation in support of either Marshall Response or fulfillment of Crown obligations (including a path to self-determination) could be evaluated against a set of criteria and a scoring system that factors in short term and long-term potential for value realization to the Indigenous group, the corresponding long-term value to Canada and Canadians, as well as [discounting] the execution risk associated with the value realization plan.

    For example, if the proposed Clearwater-Membertou transaction, after factoring in the high use of leverage by the buyers (Premium and Membertou), shows a high degree of risk-adjusted returns to Membertou then it should score high on an estimate of long-term value to Canada and Canadians. 

    In this case, the Minister is not asked to extend new access or to make new allocations, but rather to approve the effective transfer of Clearwater’s licenses to Membertou which has a [presumably] controlling agreement with Membertou and other First Nations that also has some impact-benefit features.  It sounds similar to what Clearwater has already done with its surf clam licenses and the Minister did approve this, while being clear that the idea of a new-entrant to the offshore surf clam fishery still remains under serious consideration. If the requested transfer were qualified on approval by the Minister as bearing an undefined term rather than constituting the permanent property of Membertou as implied), would Premium Brands and Membertou still wish to acquire Clearwater anyway?  There is no logical reason why they shouldn’t if they had already decided that the proposed price represents good value. 

    Whether or not the Minister approves the proposed license transfer, the Minister’s view of Clearwater monopolies should not be affected, nor should the view of Membertou and/or Premium Brands regarding the acquisition of Clearwater.  These are two separate issues that should not be conflated, and if they are being conflated in the decision processes of Membertou and Premium Brands then it seems there is a misunderstanding about how access and allocation works in Canada.

    The Minister will decide if the proposed arrangement constitutes the best use of Canada’s ocean wealth or if it could potentially generate more value (including a more diversified sector and stronger Artisanal fleets) through a competitive tender process that can occur now or at any time in the future, regardless of who owns Clearwater, or the licenses fished to supply Clearwater.
  5. Support a Modernized Artisanal Fleet – The most competitive fishing fleets of the future may look different from today, and timely adoption of new technologies on the vessels and throughout the value chain could significantly drive future competitiveness.  Access and allocation opportunities that exist today present opportunities to implement progressive accountability measures like gear tracking, “ropeless gear” trials, electronic monitoring systems, etc. Missed opportunities to advance such technologies and practices can be costly on the sector’s competitiveness, particularly for the Artisanal fleets.  The Minister could call for a competitive tender process on new capacity that would promote the adoption of technologies that help ensure the artisanal fleets’ competitiveness for the long term.
  6. Make the Minister an Offer She Can’t Refuse – If by transferring licenses to a First Nation partner the prior (non-Indigenous owner) has placed those licenses outside the reach of Ministerial Discretion (as the valuation delta of Clearwater implies), then the Minister’s acceptance to this would signal to the market that there is a first come first serve understanding in terms of Indigenous allocations that achieve de facto permanent property ownership.  Clearly this would be extraordinary (nuts) and could have final-nail kind of disastrous consequences for both the Artisanal fleets and Indigenous community fisheries programs.  Both would end up chickenized as discussed in Ship of Fools.  While Membertou First Nation would constitute 50% of the chickenizing party, the entire Artisanal and most of the Communal-Commercial fleets should find no solace in knowing they were chickenized by a corporate overlord that is 50% Native-owned.
  7. Unrealized Long-Term Value in the Indigenous Seafood Value Chain. There remains a great amount of unrealized long-term growth, value realization and capacity development potential for the people and communities among the treaty beneficiaries.  Value realization components (harvest methods and practices, utilization, marketing and distribution) are long-term controllable elements of how moderate livelihood fisheries can be implemented.  Higher value realization within a moderate livelihood program means less fishing pressure required to meet the moderate living threshold.

Approaches that help moderate livelihood harvesters to realize more value can be designed around moderate livelihood access opportunities with PIIFCAF compliance.  While the 720-ton Clearwater allocation may seem relatively small in today’s market, the Minister has a basis for expecting that if converted to moderate livelihood (all of it say, just for discussion) this would equate to [a swap-out] of ~35 – 50 inshore licenses that today are valued at ~$750,000 each.  If viewed through the long-term lens of potential moderate livelihood value realization, and corresponding long-term utility to the Crown in maximizing long term sovereign wealth, then today’s equivalent of 35 inshore licenses could represent a better utilization of offshore quota.

IV. Billion-Dollar Deal – My Foote

Several media outlets have reported that the Membertou-Premium Brands-Clearwater deal represents a billion-dollar deal, although none have provided a breakdown or even any indication of how this valuation was determined.

More commonly an acquirer would claim having bought at a low price that represents good value rather than quoting a price that is essentially double the face value of the publicly visible transaction. 

So, what’s going on here?  Why is this billion-dollar figure bandied about with little to no explanation of its derivation?  It could be my [friend Tim] Foote!  It could be.

What it *is*, is cartoonization and the construction of narrative in order to create perception, which is part of the genius of Tim and other top-notch institutional sales professionals who know how to create perceptions and influence decision-making.

Tim is truly a master at this, which I think is a big reason why he’s the Bay Street superstar that he is.  He could convince you that the most overdone steak on the grill is actually the best one and that he saved it specially for you, and he does this with uncanny effortlessness.  I’ve seen it – (1) introduce the suggestion (“this is the best steak you’ll ever eat, seriously”, (2) casually shift the topic to something that highlights the history of friendship/relationship (how are Jenny and the kids these days?), (3) refer to a time “remember that time we …”, (4) shift back – “time’s wasting, you want this f-ing awesome steak or should I give it to someone else??” 

It happens fast … just like that … and you’ll walk away thinking man I’m so lucky that Tim is my friend, we have such great times together and he always saves the best steak for *me*.

Getting back to the billion-dollar deal … and all friendly ribbing aside.

The most plausible theory is that the billion-dollar figure is obtained by adding to Clearwater’s market capitalization the estimated value of all the Communal-Commercial quota of all the First Nations participating in the Clearwater acquisition and pledging their future catches to Clearwater.  If we use this same figure for discussion purposes, we can infer that ~$500 million in license/quota value is being [permanently?] removed from the pool of independent inshore licenses and becoming the de facto permanent property of Clearwater.  This also paves the way for all other Communal-Commercial quota to similarly be taken permanently off the market by corporate partners, further weaking the Artisanal fleets as discussed in Ship of Fools.

Valuing Quota Offshore Versus Inshore

I’ll end this post with a look at Membertou’s recently announced purchase of lobster quota from Clearwater for $25 million.  This purchase seems to cover two offshore licenses each with 90-tonne quota attached, so that makes a total of 180 tonnes for $25 million, or ~$139,000 per tonne of quota.  Comparatively, an inshore license that costs ~$750,000 (without vessel or gear) can very conservatively be said to represent 15 tonnes per year (many owner-opertors land over 40 tonnes per year). Using the ~$139,000 per tonne price that Membertou is paying to Clearwater and the 15 tonne per inshore license estimate ($139k x 15) would imply a value of $2.1 million per inshore license as opposed to the $750,000 market price (which is already in bubble land) for inshore licenses.  If you change the 15 tonne estimate to 20 or 25 tonnes this cost disparity becomes even more pronounced.

The question is then why would Membertou pay roughly four times the price it would pay to buy more inshore quota in order to buy the much more expensive Clearwater quota.  Is Clearwater’s lobster somehow superior compared to the lobster fished inshore? There are no data to support this notion.  Is this the overdone steak trick again??

Membertou has indicated that its acquisitions will be funded by First Nations Finance Authority (“FNFA”), which is a distinctly unconventional funding source.  FNFA is a not-for-profit agency that issues debentures to raise funds that it then lends to First Nations borrowers that it assesses able to support the debt level based on their own-source revenues (gaming, tax collection, royalties, resource harvest revenue, etc.).  According to the assessment of FNFA and its debentures by Moody’s Investor Service, the FNFA is highly likely to enjoy backstopping from the federal government as needed to meet its repayment obligations to debenture holders.  Moody’s further notes that FNFA, in the event of default by a First Nation borrower, can assume full control of the defaulting First Nation’s own-source revenue including the removal and replacement of Chief and Council by FNFA.  Notably, this has never actually occurred, so there exists considerable uncertainty as to how it would actually unfold.  Any risks indirectly borne by Canadians would be factored into the Minister’s decisions concerning access, allocation and transfer approvals based on a thorough examination of all relevant factors.

Thank you for taking the time to read this post … hope you found it interesting and helpful … happy to discuss any of it any time with friends and colleagues.  You know how to reach me.

Take care, stay safe and be well!

[1] The personal name of SIFF’s Managing Member changed on October 22, 2020 from Suju Mukkatira Mahendrappa to Suju Mahendrappa Thimmayya Mukkatira, restoring the correct Mukkatira family name.  

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