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Region's biggest proposed IPO deal languishes

By Drew DeSilver
Seattle Times business reporter

MIKE SIEGEL / THE SEATTLE TIMES American Seafoods catcher-processors are moored at Terminal 91, south of the Magnolia Bridge. Executives' offices are on First Avenue near Pike Place Market.

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Seattle-based American Seafoods has demonstrated that. For more than a year, the fish-processing giant has tried to tempt Wall Street into investing in its large and unconventional initial public offering.

Like a determined angler seeking just the right bait, American Seafoods has tinkered no fewer than six times with the deal's blended stock-and-debt securities — raising and lowering the total dollar amount, cutting the price of the hybrid securities, and so on.

But so far, despite revived investor appetite for IPOs, Wall Street isn't biting on the $577.7 million offering. And with the IPO market tilting back to Internet stocks, biopharmaceutical companies and other businesses with more growth potential, observers are beginning to wonder if the American Seafoods deal has passed its sell-by date.

Should the deal not go through, the highly leveraged company — one of the biggest players in the Bering Sea fisheries, with seven catcher-processor ships — would have to find some other way to pay down or refinance more than half a billion dollars in debt.

American Seafoods still hopes to complete its IPO, which it first filed on May 23, 2003. Last week it once again updated its Securities and Exchange Commission (SEC) paperwork.

A spokesman for American Seafoods, which is headquartered on First Avenue near Pike Place Market, said the company could not discuss the deal due to SEC "quiet period" rules. Those rules limit what a company can say publicly about pending IPOs.

But outside experts point to numerous factors that could be responsible for stalling the deal:

• The debt/equity hybrids American Seafoods is trying to sell are unfamiliar to U.S. investors and may have negative tax consequences.

• The company's complex organizational and capital structure makes it hard to understand.

• Fish processing just isn't considered a "sexy" industry.

In addition, some observers question whether a successful IPO would improve American Seafoods' prospects.

"Effectively this is a capital raise, but what I don't see is a well-articulated plan for using the capital they'll be raising," said Bryan Armstrong, a principal at Chicago-based advisory firm Ashton Partners and an expert on helping private companies enter the public markets.

A cash machine for its owners

American Seafoods Headquarters:Seattle CEO: Bernt O. Bodal Main products: Pollock roe, frozen fish blocks, surimi, catfish Employees: 1,100 full time; an additional 1,000-1,300 seasonal 2003 revenue: $411.4 million (+23.6% from 2002) 2003 profit: $12.5 million (-43.7% from 2002) Offering: $550 million in income deposit securities, $27.7 million in debt Proposed ticker symbol: SEA

American Seafoods is one of the largest U.S. companies focused purely on seafood. Its main product is pollock, a North Pacific whitefish that is used to make everything from imitation crabmeat to fish sticks. It also harvests cod, hake and other oceangoing fish, and owns two catfish-processing facilities in Alabama.

The company began as the U.S. arm of Norway Seafoods, itself a subsidiary of Norwegian conglomerate Resource Group International. During the 1990s, American Seafoods rapidly grew by buying up ships from failing competitors.

Changes in U.S. fisheries law forced the company to retire nine of its 16 trawlers and, in 2000, sell itself to a group of U.S. investors led by Centre Partners Management of New York.

The latest version of the deal calls for American Seafoods to raise a total of $823.9 million. Most of that — $577.7 million — would come from selling debt/equity hybrids called income deposit securities, or IDSs, as well as a small amount of plain notes. The company also would borrow $240 million; CEO Bernt Bodal and other top executives would repay $6.2 million in loans.

However, none of that money would be directly invested in the business.

According to the prospectus, $333.2 million would be used to pay off existing loans; another $253.9 million would go to buy back high-interest notes sold two years ago, and other outstanding securities. Fees, discounts and other expenses would eat up another $43.6 million.

The remaining $193.2 million would go to the partners who own the company, as a partial cashout of their stakes. Of that, $161 million would be split among the three biggest owners: Centre Partners, Bodal and an Alaska Native corporation called Coastal Village Pollock.

Together, those three entities own more than 80 percent of the company; after the offering, they would hold 28.4 percent of the voting power.

This wouldn't be the first time American Seafoods' owners have taken large sums of cash out of the company. In 2002, after an earlier recapitalization, Centre Partners and the other owners (who at the time did not include Bodal or Coastal Village) shared $203.8 million.

Unfamiliar ground

One of the biggest factors hanging up the IPO has been American Seafoods' decision to sell income deposit securities rather than plain old stock or corporate debt.

IDSs were developed by Canadian investment banks as a U.S. analog to that country's popular "business income trusts." In both cases, the idea is for a company to pay as much of its income as possible to investors in the form of debt interest, which is deductible from corporate income taxes, rather than dividends, which are not. (CIBC World Markets, an arm of Canadian Imperial Bank of Commerce, is American Seafoods' lead underwriter.)

An IDS "staples" together a share of dividend-paying common stock and a slice of high-interest debt. For example, American Seafoods hopes to sell IDSs for $16 apiece; each comprises a share of stock valued at $11 and a note for $5 in debt principal. The income deposit securities would trade on the American Stock Exchange under the symbol SEA.

In theory, investors get a security that pays them much more cash than most stocks — interest and dividends totaling $1.64 a year in the American Seafoods case, equivalent to a 10.25 percent yield based on the initial price — but with the liquidity that comes from being listed on a major market.

That makes IDSs attractive to companies in mature industries that generate a lot of cash but have limited growth prospects, said Jules Lewy, a partner in the Toronto-based law firm of Fraser Milner Casgrain, which specializes in tax issues related to corporate reorganizations.

"If I want to go public, an 8 to 10 percent (IDS) yield is a lot more attractive than a 2 percent dividend yield," Lewy said.

Trouble gaining acceptance

But income deposit securities have had trouble gaining acceptance in the United States. Only one company, Volume Services America Holdings, has successfully sold them here; it took nearly a year to launch that $252 million deal, and the IDSs now trade 4 percent below their offering price.

In addition, the Internal Revenue Service has yet to rule definitively on the tax treatment of IDSs. If the agency decides that the entire IDS — not just the stock component — represents equity in the company, all payments to investors would be considered dividends, and American Seafoods could owe millions more in federal taxes — enough to consume much of its free cash flow.

Armstrong, of Ashton Partners, raised other concerns about income deposit securities. Since most mutual funds are limited to buying either straight stock or straight debt, he said, a big share of the market may be closed to IDSs. That leaves either individual investors or hedge funds as the most likely buyers.

Also, holders of the IDSs would have the right to separate them into their component shares and notes after 45 days. If enough investors do so, American Seafoods would seek to have the stock listed on the Amex so it could trade independently.

That could open up all sorts of complex and potentially disruptive investment strategies. A fund might, for example, sell American Seafoods stock short while buying its income deposit securities, or combine options to sell the stock with options to buy the debt.

"To me, that leaves them wide open to being whipsawed by hedge funds," Armstrong said.

Then there are the dynamics of the IPO market itself.

It's not unheard of for a company to go public long after its initial filing. Republic Airways of Indianapolis, for example, finally launched its IPO last week, more than two years after first announcing its plans.

But the reality is that most IPOs are completed much more quickly. A Seattle Times analysis of recent IPOs shows that the average time from initial filing to launch was 117.6 days, or not quite four months; the vast majority of deals were completed in six months or less, and only 10 took more than a year.

American Seafoods was one of 158 companies that filed for IPOs last year. Of those, 130 have successfully gone public, including Northwest names Marchex, Rainier Pacific Financial, AMIS Holdings and Xcyte Therapies.

Thirteen other companies formally withdrew or postponed their IPOs. That leaves only American Seafoods and 14 other members of the class of 2003 waiting at Wall Street's altar.

The lengthy delay in American Seafoods' offering "is certainly not a nail in the coffin, by any means," said Phil Colbran, a partner at the New York law firm of Chadbourne & Parke and co-author of "An Insider's Guide to Going Public."

But over the past year, Colbran noted, most of the attention on Wall Street has swung away from basic industries like food processing and back toward fields like biotechnology, software and the Internet, seen as having more growth potential.

"In recent times, biotechs and China-based companies have been the hot markets," he said. "Other companies may have a harder time selling — investors do have something of a herd mentality."

Short attention span

They also have short attention spans, which could work against American Seafoods. One reason given for the IPO is to simplify the company's organizational and capital structure, but even after the offering it would remain a web of interlocking holding companies, partnerships and limited-liability companies — making it hard for investors to figure out what piece of the company they're buying.

And with dozens of companies trying to squeeze through the IPO window — nearly 180 have filed to go public so far this year, 44 this month alone — investors have a lot more places to lay their bets than they did a year ago

"With a capital structure this complex, I don't see why any manager on Wall Street would spend the extra time to figure this company out," Armstrong said. "They're going to have to work very hard to launch this security."

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com.

Copyright © 2004 The Seattle Times Company

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