Omega Protein rejects investor's assertion that diversification strategy has failed

By Hank Schultz

- Last updated on GMT

Image: Robert K. Brigham - NOAA's Fisheries Collection.
Image: Robert K. Brigham - NOAA's Fisheries Collection.

Related tags Omega protein Stock Omega-3 fatty acid

Omega-3 supplier Omega Protein has conceded a point in its tussle with an activist investor by agreeing to nominate for a election a board member put forward by the investor, Wynnefield Capital. But the company rejected a call for an abandonment of its strategy of diversification into human nutrition markets.

Omega Protein has been first and foremost a fishing company, harvesting menhaden, a forage fish species, in the Gulf of Mexico and off the eastern seaboard in and around Chesapeake Bay. In recent years the company, mostly under the leadership of CEO Brent Scholtes, has sought to diversify to lessen its financial reliance on the extraction of an inconsistent raw material. Menhaden stocks fluctuate naturally, and there has been some disagreement among stakeholders about how best to assess the stocks. Several years ago a significant cut in the quota for the the Atlantic catch was put into place, a reduction that Omega Protein claimed was based on shoddy data. The quota has since been lifted, but it was a sign that the company’s financial stability was based on shifting sands.

Diversification strategy questioned

To address this situation, the company sought first to derive higher value products from its menhaden catch, which in the past was going to fish meal and bulk fish oil sales for animal nutrition. The company brought to market a line of omega-3 oils for supplements, and in the process became the largest supplier of such ingredients based in the US, though it is dwarfed by other omega-3 oil suppliers based overseas. The company also sought to move further into the supply of ingredients for food and supplements, first by buying Cyvex Nutrition, a supplier of botanical ingredients, in 2010 and then subsequently acquiring Wisconsin Specialty Protein, a whey supplier, and Bioriginal, a lipids ingredients specialist.

Wynnefield, under its principal Nelson Obus, has claimed that this process has been mismanaged, and that Omega Protein overpaid for those assets. In a recent earnings call with analysts, Scholtes appeared to concede the point that the company had paid about $160 million for its human nutrition acquisitions, assets that would be worth about $100 million if they were to be sold off today. To Obus, this constitutes a breach of the company’s fiduciary responsibility to shareholders.

“Based on our conservative projections, Wynnefield believes that Omega has now lost at least $7 per share in stockholder value due to its failed efforts to enter the Human Nutrition business.  Given the Company's strong presence and exceptional long-term performance in the Animal Nutrition business (operating income and gross profit nearly doubling year over year), stockholders are left wondering what could have been - and what should have been - but for Omega's ill-conceived foray into its Human Nutrition business,”​ Wynnefield said in a recent statement.

Strategy successful, board says

In a letter sent to shareholders last week, Omega Protein’s board of directors took issue with Wynnefield’s assertion that Scholtes’ strategy for the company has been a failure.

“In the four years since Bret Scholtes was appointed Chief Executive Officer. From Mr. Scholtes' appointment on December 30, 2011 to May 6, 2016, Omega's stock price has increased 176% as compared to 50% for the Russell 2000 and 64% for the S&P 500,”​ the board said.  In addition, the board said other measures showed similar strong gains:  gross profit in a similar period rose 99%, adjusted EBITDA rose 93% and revenues were up 43%.

In the same letter the board said it would nominate David H. Clarke, one of the candidates that Wynnefield put forward, for election to the board of directors.  The letter also said that a recently concluded nine month strategic review affirmed that the company’s current course is the in the best interests of shareholders. 

Stock traders have seemed to support the board’s conclusions.  The company’s stock rose after the announcement of the strategic assessment and the first quarter results, trading at $19.51 a share today.  However, that isa drop from the 52-week high of more than $25 a share achieved in late November 2015.

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