Court hearing reveals state of StarKist’s finances, delay in American Samoa investment
StarKist has little cash on hand, and has postponed a planned USD 77 million (EUR 68.5 million) expansion of its tuna processing facility in American Samoa, according to a recent court filing in its federal price-fixing case.
In a 12 June hearing to discuss StarKist’s fine for pleading guilty to fixing the prices of canned tuna it sold in the United States between 2011 and 2013, StarKist counsel Niall Lynch acknowledged the company did not have the money to commit to expanding production of pouched tuna products in American Samoa.
“The company has already decided that it probably can't go forward with its plant expansion in American Samoa because it doesn't have the money,” he said.
Pittsburgh, Pennsylvania-based StarKist has been pushing for a reduced fine of USD 50 million (EUR 44.3 million), while representatives of the U.S. Department of Justice’s Antitrust Division argue the company can afford to pay USD 100 million (EUR 89.1 million). U.S. District Court Judge Edward M. Chen will resume hearings on the matter in August, after the two sides sparred for hours over the state of StarKist’s finances without coming to a compromise.
The details of that conversation, released in a court transcript on 18 June, reveal a mixed picture of the company’s financial situation. StarKist appears to be paying down its debt – it had USD 290 million worth of debt in 2011 but that figure was reduced by USD 140 million (EUR 124.6 million) 2018. Its outstanding debt appears to composed entirely of a USD 150 million (EUR 133.5 million) loan it renegotiated with a consortium of lenders led by South Korea-based KEB Hana Bank in October 2018. In its projections – barring changes caused by the imposition of the criminal fine – the company expected to lower its total debt to USD 50 million (EUR 44.5 million) by 2024.
In addition to its core holdings, the company also holds investments in Indian packaging technology firm TechPack valued at USD 155 million (EUR 138 million) and in Silver Bay Seafoods, a salmon supplier based in Seattle, Washington, U.S.A., worth an estimated USD 12 million (EUR 10.7 million).
The TechPack holding became a central piece of the argument presented by the DOJ in the 12 June hearing, as its estimated worth exceeds the highest possible fine StarKist could receive in the case. That led Chen to order StarKist to explore a sale of its holding in TechPack.
"Even at a fire sale there seems to be a lot of value there," Chen said.
Lynch called the prosecution’s insistence that it sell off TechPack ”wrong.”
“This is absurd,” he said. “We have the Department of Justice telling Starkist how it should run its business, what strategic assets it shouldn't own and which assets it should own.”
Lynch described TechPack as a “strategic key asset” for StarKist.
“It was sufficiently important enough that even before this investigation started – before any of this started, they thought it was worthwhile as a business venture to invest in it, and they made that decision. Now, the question about liquidation beyond the limitations by contract, who would buy this?” Lynch said. “This is most valuable to StarKist. If we were to have to go out and sell it, it would be a fire sale. We would lose substantial value. We don't even know if there would be a willing buyer out there. It is not the kind of asset you can easily sell or transfer.”
Lynch said a sale of TechPack was further limited by its loan agreement, which stipulates that a sale of TechPack has to be approved by a majority of lenders.
But Chen said the company had not done enough to show the asset couldn’t be sold.
“Everything I have seen is that this is a desirable, a smart, perhaps, and a good investment, but not one that is essential to the continued existence of Starkist. The burden of proof would be on Starkist to demonstrate that that consent could not be obtained. And given the fact that this is a guaranteed loan – loan – guaranteed by the parent [Dongwon Industries], I don't see any evidence in that regard. So I'm having trouble seeing how the Defendant has met its burden of proof with respect to Techpack, to show that either its simply not salable or not salable for even a fraction of its value but enough to produce enough cash flow, that the bank would – it would be impossible to get the loan,” Chen said.
DOJ attorney Andrew Mast pointed to TechPack, and also to StarKist’s payment of USD 20 million (EUR ) to its parent company, Dongwon, as evidence that StarKist has ample resources to pay the full fine. But Lynch countered by saying that payment was made in 2016 as part of Dongwon’s request to see “returns on their investment,” and that no dividends were paid by StarKist to Dongwon in 2014 to 2015, or 2017 through 2019.
In regard to Dongwon, Mast intimated that the South Korean conglomerate – which registered USD 5 billion (EUR 4.5 million) in assets in 2018 – might easily be able to help pay StarKist’s fine to protect its investment in its subdiary. Lynch countered by arguing that such a stipulation was not made of Bumble Bee Foods and its parent company, Lion Capital, when Bumble Bee’s criminal fine was reduced from USD 81 million (EUR 72.1 million) to USD 25 million (EUR 22.2 million).
Lynch said StarKist would be amenable to an agreement in which its civil settlements on the price-fixing issue could count against the USD 100 million total, with the contingency that a cap of USD 100 million (EUR 88.9 million) is set on its total payments. Thus far, StarKist has paid out USD 55 million (EUR 49 million) in such settlements, with about 75 percent of lawsuits filed by those involved in direct sales settled; the cap would not include that money.
But Mast said StarKist would be able to claim a tax deduction on the remainder of its civil payouts, which will likely include agreements with the indirect purchaser class, as well as the consumer class, and the remainder of the direct purchasers.
“If that proposal comes to fruition, I don't expect the government to see a penny over USD 50 million, even though StarKist has substantial assets,” Mast said.
Lynch said the case should simply came down to StarKist’s inability to pay the fine.
“Regardless of the legal ability of the court to do [implement the full fine], factually it is impossible. We don't have the cash. We have … approximately USD 6 million [EUR 5.4 million] in the bank today,” he said.
Furthermore, sales at the company are flat, Lynch said.
“We’re really not profitable at all,” he said.
Canned tuna sales are declining in the U.S., and while pouched tuna products are showing promise and increasing popularity, they only represent 16.2 percent of the company’s current sales by value, Lynch said.
In agreeing to a hearing in August, Lynch pushed for a rapid resolution to the case.
“As long as there is continued uncertainty as to what this fine will be, it will cause the company to have to restrict itself in terms of its ability to be competitive, to compete, to innovate, to produce new products because it doesn't know if it has the money,” he said.
Photo courtesy of StarKist