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11 Oct 2016 By Una Galani

Thai Union has made a good catch. The Bangkok-listed owner of tinned tuna brands John West and Chicken of the Sea is paying $575 million for a stake in Red Lobster, the U.S. restaurant chain. It is a big strategic shift for a $2.8 billion company that specialises in tinned and frozen seafood. But a low valuation and some clever deal structuring befits Thai Union’s track record as a cautious, smart acquirer.

The tie-up is an odd vertical integration, giving the seafood processor a 25 percent stake in a longstanding customer. Thai Union will also get preferred stock, which can convert into an additional 24 percent of ordinary shares at any time within ten years, plus two board seats. In addition, Thai Union will be able to make further investments. That implies the two sides have agreed a potential path to control if Golden Gate Capital, the buyout group that has owned Red Lobster since 2014, were to later seek a full exit.

Overall, it stacks up as a cautious way to diversify. The preferred stock pays an 8 percent coupon, or $28 million a year – attractive in today’s low-yield world. The investment values Red Lobster at a cheap 7.4 times forward EBITDA, UBS estimates. Thai Union, which itself is a slightly higher-margin business, trades on almost 11 times, according to Eikon. Over the longer term, the Asian company could deploy Red Lobster’s strong brand across its existing businesses, potentially selling seafood products under that name.

Thai Union has built an impressive global footprint through acquisitions and without running into financial trouble, but it is getting harder to grow. Antitrust concerns prompted it to abandon a $1.5 billion bid for U.S. rival Bumble Bee last year. That might explain why Thai Union is experimenting with a new business line. If Thai Union ends up swallowing Red Lobster, an annual $2.5 billion of revenue will go a long way to helping the buyer achieve its goal of hitting $8 billion in sales by 2020. Thai Union’s fishing expedition is a juicy new bite with a familiar flavour.


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