Omega Protein is the country’s largest menhaden harvester and is the largest processor of fish meal and fish oil based in the US. It has pursued a diversification strategy for a number of years as a way to insulate its bottom line from the vagaries of harvesting a fluctuating natural resource. In recent years, for instance, the company has dealt with significant catch limits on its Virginia fishery (the company also operates a fishing fleet in the Gulf of Mexico).
Human nutrition acquisitions
The company has moved into human nutrition markets via an omega-3 ingredient refined from its own fish oil stream and has purchased dietary ingredient supplier Cyvex Nutrition, whey producer Wisconsin Specialty Protein and lipid ingredient supplier Bioriginal. It has grouped these assets in a division named Nutegrity.
“Our strategic goal has been to become a more balanced and stronger nutrition company, with greater growth opportunities, expanding our customer segments in end-markets and reducing our reliance on any one product. We continue to make measurable gains against these objectives this quarter,” said CEO Bret Schotes in the company’s second quarter 2015 earnings call with analysts six days ago.
Nelson Obus, a principal in Wynnefield, isn’t buying the story. From his point of view, Omega Protein overpaid for its acquisitions and has now assembled a patchwork quilt of a company that lacks strategic direction.
“You can look at all of the 10Qs they’ve filed since they started buying human nutrition businesses. Most of the press releases over that time have talked about the businesses being accretive. You can add up what they paid for those businesses and it’s the range of $150 million. You can see that they have been losing money,” Obus told NutraIngredients-USA.
Wynnefield filed its form 13D on Tuesday. This is a required step under SEC rules when an investor passes the 5% stock ownership level in a company. The investor is required to disclose the amount of its holdings and may chime in with what plans, if any, it has for influencing the company’s strategic direction. (This is the second such form filed on Omega Protein in recent days; the other, which was more of a pro forma exercise, was filed by an investor named Joshua Schechter).
Obus didn’t pull any punches in the narrative portion of Wynnefield’s 13D.
“While the actions of the Board of Directors of Omega Protein may be afforded protection under the "Business Judgement" safe harbor, the ugly truth is that the Omega Protein Board and its management have flushed away $150 million of shareholder value trying to enter a business that the Board and management lacked the skill sets to integrate, manage or execute on a successful strategic plan. . . To cut to the chase, Wynnefield believes that, as a result of the Board’s poorly analyzed, poorly executed and unsuccessful actions, it has forfeited the right to maintain Omega Protein as a public company. . . . Your road forward must entail the immediate hiring of a reputable investment banking firm to explore all strategic alternatives to maximize and release shareholder value, including the sale of Omega Protein or its assets,” the form read.
Omega Protein responded to Obus’ criticisms with the following statement from board chairman Gary R Goodwin, which the company said would be its only communcation on the matter for the time being:
"The Board of Directors values open dialogue and input from all our shareholders. While we believe the company's current strategy will create substantial long-term value for shareholders, we will thoughtfully review the matters raised by Wynnefield Capital. The Board and management team are committed to undertaking actions that we believe will enhance value for our shareholders, and we intend to consider this letter with that principle in mind."
Daybrook deal acts as catalyst
Over the past 60 days Wynnefield has conducted about 50 separate transactions in Omega Protein stock. The small cap investment fund appeared to start accumulating stock in the wake of the sale of Daybrook, the second biggest menhaden fishing company in the US, to South African firm Oceana. That $385 million deal was announced on May 15.
“They are allowed to make bad decisions. I’m not saying they did anything illegal. They exercised their judgement; it was bad, and now it’s time to move on,” Obus said.
Obus is no stranger to a fight. In 2002 Wynnefield Capital was cited for insider trading by the SEC. Obus chose to contest the charges, and was exonerated in a jury trial in July, 2014. Obus reportedly spent a minimum of $9 million fighting the case.
Positive earnings statement
Obus’s move against Omega Protein’s management came in the wake of generally positive earnings. Highlights from the company’s recent second quarter 2015 earnings statement:
- Revenues: $93.2 million for the quarter, compared to $71.9 million in the same period a year ago.
- Gross profit margin: 27.7% for the quarter, compared to 28.4% in the same period a year ago
- Net income: $8.8 million, or $9.6 million on an adjusted basis for the quarter, compared to $6.6 million, or $8.3 million on an adjusted basis, in the same period a year ago
- Earnings per diluted share: $0.40, or $0.43 on an adjusted basis for the quarter, compared to $0.31, or $0.38 on an adjusted basis in the same period a year ago
- Adjusted EBITDA: $21.6 million for the quarter, compared to $18.3 million in the same period a year ago.