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  High Liner's turnaround is as elusive as a mermaid

BENJ GALLANDER and BEN STADELMANN

Saturday, October 14, 2000

When we acquired Lunenburg, N.S.-based High Liner, or National Sea Products as it was called back then, it was a fairly straight-forward case of a company down on its luck. The firm had done extremely well in the late 1980's, riding high on its ubiquitous Captain High Liner advertisements, and by capitalizing on the shift in consumer tastes from meat to lighter fare.

Then came the collapse of the East Coast fishery and the stock tanked from its high of $72 in 1988. Despite the gravity of this crisis, our experience is the market generally overreacts to such misfortune.

For the first couple of years the stock undulated, and we were happy to give it a bit of leeway knowing that the company was going through major changes. By 1998 it seemed to be on track with the stock up near $11 at year-end and the company reporting growth in sales, profit and cash flow.

With this firm's terrific market penetration, reputable brand name, and climbing profitability, we looked forward to the stock continuing to move upward to our target of $21.50. Disturbing this optimistic view was a company warning that raw material costs for most of their major seafood products had increased 50 to 60 percent. Alas, we treated that message like a poor weather report on a weekend outing, when the klaxons were blaring "abandon ship!"

With other consumer staples such as beef or pork, food processors are able to hedge against the potential impact of higher prices by forward buying on commodity markets. But there is no contract for kippers or scallops at the Chicago Mercantile Exchange. Passing higher prices on to the consumer is also difficult, because it's easy to reach for chicken nuggets if fish sticks become pricey.

In 1999, margins were severely squeezed and the company racked up a loss of more than $4 million. But the damage went further than expensive fish. In an effort to reduce dependence on seafood, High Liner made a foray into the frozen pasta business by taking over New York-based Italian Village. There was some logic behind the expansion; after all High Liner already had a distribution channel in the United States and had experience with frozen f ood. But the High Liner move has been anything but a success so far.

In the weeks prior to the close of the deal, High Liner claims Italian Village sold tons of product to their best customers at very favourable terms. By the time High Liner got the keys to the front door, customers had lockers full of pasta.

High Liner has sued for breach of contract, but the case is unsettled, and Canadian companies often find it difficult to overcome American "home court advantage." Meanwhile, with losses mounting, investors found High Liner stock to be about as appetizing as a snake fish, sending it to a low of $2.80.

So now what? Put this position out to sea in a small boat and move on? Perhaps that would be the smart thing to do. But we are doing well with our Nabisco stock and remain convinced that value lurks in big-name food processors. The demographics of the fish business remain appealing -- every time a baby boomer goes for a cholesterol check there is a high probability of a newly motivated customer.

Our decision to hang in a while longer is also based on our assessment that High Liner's management has been fairly straight with us. They did realize that high prices for raw materials were about to torpedo earnings but got the wool pulled over their eyes when they tried to diversify. It happens. Now that fish prices are moderating, pasta sales are finally increasing and management is pointing to a return to profitability, we are inclined to believe that the hook is finally set to land a big one.

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