Dec. 2 - WorldCatch News Network - John Risley took three years to snag Newfoundland fishing giant FPI Ltd. then, as soon as he reeled it in last fall, he fed it his own firm, Clearwater - and became CEO of Canada's biggest seafood company

John Risley could be excused his nervousness as he scanned the panorama of Halifax harbour from his third-floor office window. The view had been an unexpected bonus when he and his brother-in-law, Colin MacDonald, first located Clearwater Fine Foods Inc. on the Bedford Highway site in 1976. Functionally, the building -- and for that matter, Risley -- hadn't changed much.

True, the ground-level shop and the smart corporate offices above it had lived through at least 10 haphazard expansions; it had almost kept up with Clearwater's remarkable growth as Risley wheeled and dealed the company into a $345-million seafood powerhouse, operator of Canada's biggest fishing fleet. And Risley's Mercedes in the parking lot, along with his collection of classic cars, racing yachts and three mansions, were icons of his personal prosperity since his days of wharf-side haggling with lobstermen.

But his periodic grousing to Clearwater's lawyer Greg Arsenault and financial adviser Bob Wight about the time investment bankers had been taking tieing up his latest transaction, was typical of the restless impatience that characterized the hundreds of deals in which Risley had been involved since founding Clearwater 25 years earlier.

The one he was about to complete, however, trumped all the rest in size and bizarre complexity. Two years earlier, Clearwater had tried to take over St. John's-based Fishery Products International Ltd. (FPI). When that failed, Risley went out and bought himself a minority share in FPI and triggered a proxy battle. It ended successfully last May with the ousting of FPI's board and management and the installation of his slate of nominees, including his friend Derrick Rowe as chairman. But now, Rowe was turning things upside down: The bankers had spent the day panting up and down the stairs between Risley's office and Clearwater's first floor board room, where Rowe had set up, putting the final touches on the agreement that would see FPI buy Clearwater and install Risley as CEO. It was as though a shark, having wounded a whale that it had hunted, was now agreeing to be swallowed itself by the whale. When Rowe and Risley finally met in late afternoon to shake hands, it was to celebrate the whale's expanded size: They had created the biggest seafood company in the history of the Canadian fishing industry.

But many who'd watched the fight thought they'd detected a fishy smell. Already rich, Risley and his family, who own Clearwater, stood to get richer. Rowe was offering him $300 million in debt and FPI shares for Clearwater. Dividends raise the final price above $510 million. In effect, the price values the smaller Clearwater higher than FPI. As well, it hasn't escaped notice that the once thrifty FPI's debt load had tripled to about $310 million. To many Newfoundlanders, the technology-driven efficiencies Risley and Rowe promised to justify the merger had a whiff of job cuts in an already fragile economy.

For their part, investors might well have wondered whether John Risley, who's never worked for anybody else in his career, and who admits to high risk-tolerance and disdain for "bureaucratic bullshit," has the ideal characteristics to run the biggest seafood company in Canada -- even if he did create it.

Since John Cabot first discovered schools of cod off the Grand Banks in 1497, the sea has provided a living for generations in Atlantic Canada. In Newfoundland, it has sustained outport communities. In larger centres, the fishing spawned larger companies, often family-controlled, which operated both fishing vessels and processing plants.

But when changes to the law of the sea extended Canada's exclusive fishing grounds from 12 miles to 200 miles from shore in 1977, East Coast fishing companies borrowed to expand, hoping to reap a bonanza from Canada's expanded coastal zone. By the early 1980s, all were foundering on the rocks of inflation and high interest rates. In 1982, in hopes of rescuing the industry, Newfoundland cobbled eight bankrupt fishing companies into Fishery Products International, a quasi Crown corporation not dissimilar to Air Canada. When FPI continued to founder amidst labour disputes and internal wrangling two years later, the frustrated province hired Victor Young, 39, to make sense of the mess.

Young, a Newfoundlander who'd risen to CEO and chairman of provincially owned Newfoundland and Labrador Hydro, validated the province's decision. Within two years, he'd sold 15 of FPI's 34 fish processing plants, paring 3,500 from a staff of 11,500, and placated truculent unions. A year after coaxing the company back to profitability, chafing at FPI's Crown-corporation status, Young raised $200 million in an IPO and bought out the government and the Bank of Nova Scotia, the principal creditor. "The government was always there as a backstop," says Young, now 56. "If people didn't like what management was doing, they'd go to the government. It was impossible to operate efficiently."

Government didn't bow out completely, however. To make sure FPI would remain under the control of Newfoundlanders, Premier Brian Peckford's government passed the FPI Act. Among other things, it stipulates that no shareholder or consortium can vote more than 15% of FPI's shares, and requires the majority of FPI's directors to be Newfoundland residents.

Government can't legislate good fishing, however. In 1992, when failing cod stocks forced a moratorium on fishing, Young restructured FPI again, cutting the workforce to 2,400. By 1996, he had nursed FPI back to health for good. Last year, its $735-million revenue wasn't far behind the $1-billion value of Newfoundland's entire fishery.

Despite his role as FPI's perennial saviour, Young's success was tainted in some views. Young defends the FPI Act, comparing it to similar legislation designed to maintain widely held, Canadian control of companies such as Canadian National Railways and Air Canada (which last October revoked its 15% ownership cap). "The FPI Act recognized that the fishery in Newfoundland is special," he says. But it also insulates Young and FPI from market disciplines such as the threat of a takeover, and dampens risk that can boost growth and investor enthusiasm. As evidence, Risley observes that FPI's stock hasn't been close to its $12.50 issue price for the last five years. Young's failure to use debt as leverage to grow, he says, is another languishing opportunity. And John Risley isn't above putting a little fear into the lives of anyone -- individuals, companies, governments, or all three -- that he believes is wasting an opportunity.

It would be difficult to imagine more different backgrounds than those of Vic Young and John Risley. While Young was acquiring a BComm at Memorial University and then an MBA before joining the provincial power utility, Risley, a Dalhousie University drop-out, was cranking up a real estate career financed by "anyone who would lend money to me." By the mid '70s, Young was on his way to becoming CEO and chairman of Newfoundland Light and Power and a director of the Royal Bank; Risley, who says he made and then lost a fortune, couldn't get in to see the manager of his local branch to bootstrap the lobster business suggested by his wife's brother, Colin MacDonald. "The bank told me to get lost," he says.

Undeterred, Risley and MacDonald borrowed $15,000 from friends and began trucking lobsters bought in Halifax to New England where they got a better price. What they didn't export, they sold from Clearwater's rented Bedford Highway store. Risley can't recall what he told the bank to get a line of credit for the first of many expansions. "But I've always been a pretty good bullshitter," he says. "So I'm sure it was a good line."

To a business not particularly renowned for its inventiveness, Risley added his own strain of the trait. For instance, his commitment to deliver live lobsters to customers year-round ignored elementary biology: lobsters are only trapped in two seasons; when moulting they can't be sold. "We said, 'We'll fix that,' without really understanding how we were going to fix it," he confesses.

The solution was a system for storing live lobsters in compartments piled two storeys high over which cold sea water is run constantly; the proprietary technology tricks the lobsters into hibernating instead of moulting, enabling Clearwater to air-freight fresh lobster around the world, even off-season.

Not everything worked, Risley admits. A $10-million investment in the late 1980s in an ambitious aquaculture venture that included mussel beds ended ignominiously: "The ducks ate them," Risley shrugs. But diversification and acquisition paid off. By adding trawlers and processing plants, Clearwater could offer customers a full complement of high-end shellfish: scallops, shrimp, crab, clams. The growth of the original shop reflected both Risley's impatience with bureaucracy and his predilection for ignoring it when it gets in his way. "We didn't have time for things like building permits," he says. "We kept putting on illegal additions. The building inspector kept walking in saying, 'What's going on here?' And I'd say, 'You just missed the boss. He just left.'"

Inevitably, as FPI and Clearwater expanded, their orbits intersected. Although their core businesses were different -- Clearwater is mainly shellfish, FPI primarily groundfish -- both companies' agents procure product from around the world, process it in their plants and distribute to wholesale and retail markets. By 1999, FPI's revenue of $712 million was about twice that of Clearwater. Although the Nova Scotia company's shellfish are a higher-margin product line, Clearwater's estimated $200 million in debt (as a private company it didn't reveal its financial information) was double FPI's.

The more Risley saw of FPI, the more it irritated him that it wasn't leveraging its strong financial position to grow. He figured a union of FPI and Clearwater would create a strong player in the increasingly competitive global fishing industry.

In mid 1999, he decided to test his theory. With partners Bill Barry, owner of the Newfoundland fishing company The Barry Group, and Icelandic Freezing Plants Corp., an international seafood processing and marketing company, he created Neos Seafood Inc. as a takeover vehicle. In November, Neos offered FPI $9 a share -- a total of about $137 million -- for FPI's 15.3 million outstanding shares.

Although Risley maintains he was serious, his $9 offer for shares trading at $8.70 didn't offer shareholders much of a premium. In any case, before he could raise it, he bumped into the FPI Act. Doubtless with a nudge from FPI management, the province ruled that Neos exceeded the act's 15% ownership restriction. John Efford, fisheries minister in Premier Brian Tobin's government, offered to waive the restriction if Risley could show public support for his bid, but he was confident Risley, a Nova Scotian, couldn't. "I had no doubt in my mind that the people weren't going to accept him," he says.

Risley's proposal wasn't a hit with FPI's management, either. He was proposing adding debt to grow, just as Clearwater had. But while Clearwater claimed to be successful, nobody knew for sure. "I remember thinking he's gone too far, he's levered himself too heavily," says David Norse, FPI's CFO, who has followed Risley's career since the 1980s, when he was buying companies in the U.S. and Europe. "But he was private, so you didn't know exactly what his deals were worth."

Vic Young, meanwhile, refused to apologize for being a conservative manager. "That's an obsession that comes from a history where every time fishing companies lever themselves and you have a downturn in the fishery, the companies go bankrupt," he says.

Risley's PR strategy was also wanting. The outspoken Bill Barry, who had a reputation as a union-buster (and who even Risley admits is a little "rough around the edges") lived up to his loose-cannon reputation when he boasted that Neos would execute Plan B -- buy up shares and turf the directors -- if FPI's board thwarted the takeover. Risley's denial of such a plan (which in fact he would implement only months later) couldn't overcome Newfoundlanders' suspicion, however. And his inability to rally public support made it easier for the government to retain the FPI Act. "With this legislation in place, FPI has been doing very well," observed Efford. "It's not broken, so don't try and fix it."

Still, Newfoundlanders understand that fishermen don't take kindly to being skunked. "We all figured Risley would be back," says Des McGrath, the union rep who sits on FPI's board.

While Risley's arguments failed to sway public opinion, they resonated with former federal fisheries minister John Crosbie, an eloquent and influential native son who believes parochial fear of outsiders has stunted Newfoundland's development. "It's the sort of thinking that says, 'Well, if someone from another province has an interest in this company that's bad for Newfoundland,'" says Crosbie. "This is crap, and it's the kind of thinking that we've got to combat here."

Risley had pretty much decided the same thing. In late 2000, he implemented the Plan B he'd denied he had. He set out to grab enough proxy votes to replace the recalcitrant board at the May annual meeting with one more amenable to his approach. Clearwater spent nearly $19 million for a 13.6% stake in the company. Icelandic Freezing Plants bought 15%. Newfoundland Freezing Plants Corp., a consortium that includes the Bill Barry's company, bought 10%. Sanford Ltd., a major New Zealand seafood company, also bought 15%.

News that Risley and friends -- all "from away" except Barry -- now controlled 53.6% of FPI again tweaked Newfoundland's xenophobia. In St. John's, The Telegram ran a cartoon of John Risley gobbling a mound of fish and "blue chips" -- overlooking the fact that FPI shares had proved anything but; they'd been worth $12.50 when it went public; now, more than a decade on, they traded in the $9 range.

The proxy battle became a clash of styles. Risley's three Nova Scotia mansions, private plane, exotic cars and adventures racing sailboats as far away as New Zealand, cast him as a swashbuckling plutocrat. By contrast, Vic Young couldn't help but look dull and conservative. Young and his board, in fact, had been loath to risk much even on their own company; collectively they only owned about $1 million worth of FPI shares. Risley alone owned more shares than the entire FPI board.

Once he became a major shareholder, Risley challenged Young more directly. He suggested a joint Clearwater-FPI scallop venture in early 2001 that would bring FPI new revenue. When Young turned him down, he labelled FPI management as unco-operative. Young, however, says Risley wanted assurance "that Clearwater would likely have some future control over FPI." Risley's negotiating style is to appear progressive and make the other party look obstinate. Risley, he claims, invited him to step down as CEO and chairman of FPI, knowing full well that the request was a deal-stopper.

Risley, in fact, had Young's replacement in mind. Derrick Rowe, a fellow entrepreneur, was rich and restless since selling his shares in Stratos Global Corp., a telecom company he founded in the '80s. Rowe knew nothing about the fishing or food industries. But persuaded by Risley that good management could unlock FPI's unrealized value, Rowe bought a 1% stake in FPI and agreed to stand as chairman at the annual meeting on May 1. The subsequent recruitment of John Crosbie and Nova Scotia grocery chain magnate Frank Sobey especially added legitimacy to Risley's proxy appeal. He also promised to boost FPI's underperforming shares, increase profit margins and introduce technology that would improve productivity.

Vic Young offered FPI's record in his defence, pointing to FPI's 20 consecutive profitable quarters and a dividend that had actually risen six cents a share to 18 cents since 1999. He also played his FPI Act card, claiming that Risley, in concert with former Neos partners, held more than 15% of FPI's shares, a violation of the legislation. To Crosbie, the idea that a board wouldn't invest in a company yet ignored shareholders who did, makes Newfoundland look like an investment backwater. "Nobody here thinks shareholders should have a say in who runs the company," he rumbles. "Shareholders count for nothing in Newfoundland."

In the end, Risley didn't need the votes of his allies; by the annual meeting, he had proxies for 83% of FPI's shares. Derrick Rowe was easily elected as chairman, leaving Vic Young unemployed after 16 years at the company -- a victim, Crosbie says, of his excessive caution: "This is the most important company in the Newfoundland fishing business and it needed a change and some gingering up."

Exactly how "gingering" would come about under a new board wasn't immediately clear. As improbable as it might sound, Risley puts the lack of a clear plan down to naivete. "I'm not sure we understood all the consequences of doing something about [FPI's alleged poor management]," he says. "If we'd understood what we were getting into, we may have thought a little bit more seriously about whether or not we had the appetite for that sort of thing. It [the proxy battle] was a distressing process."

Derrick Rowe, a tyro in the fishing business, had some knotty problems to unravel. In addition to finding a dynamic new CEO who shared his and Risley's vision for FPI, there was the question of a business plan. If the objective was to use stock as currency to net acquisitions, for instance, there was still the FPI Act to contend with: a new share issue would be a tough sell so long as the 15% ownership cap remained in place.

But the solutions to both problems, it turns out, were there all along: instead of looking for someone like John Risley, FPI's new board -- a Risley creation -- decided to fatten FPI's sparse debt, buy Clearwater and get John Risley himself.

It requires a suspension of disbelief to accept that Risley would go to the trouble of an attempted takeover and then a proxy battle without a clear blueprint in mind for merging FPI and Clearwater. Yet he vehemently denies that having FPI purchase Clearwater was his plan all along. The idea, he says, was Derrick Rowe's.

Whatever the case, there is no denying the convenient brilliance of the scheme Risley and Rowe finalized during the day-long session in Clearwater's offices. On September 6, it was made official. A weary Risley cancelled his planned vacation in New Zealand where he'd intended to do some heliskiing and sailing, and instead took his private plane to St. John's where Rowe assembled FPI's employees in the office foyer to inform them of the purchase and introduce them to the new CEO, John Risley.

The details of the $510-million deal were again controversial. FPI is assuming Clearwater's $210-million debt, and paying Risley and MacDonald $100 million in preferred shares that will spin out a 5% dividend. It will also pay them another $200 million worth of non-voting common shares. Since FPI is paying entirely with debt, the percentage ownership doesn't change so the deal escapes the scrutiny of the FPI Act. John Crosbie, now an FPI director, likes that part of it. "The FPI Act handcuffs the company," he insists. "It's a hindrance to the health and ability of the company and it does absolutely nothing to protect Newfoundland."

Vic Young, now vanquished, says the idea of Risley becoming CEO of FPI, a company he partly owns, and then buying a company he wholly owns, raises questions about the fairness of the valuation of the related party deal. "If you were setting the price for your own company, would you aim low?" he asks.

But Jonathan Norwood, of Beacon Securities, one of the few analysts who follow FPI, contends that, even at $310 million, FPI's debt is manageable. Furthermore, the cost of Clearwater was less than smaller fishing companies have gone for, "and they've [FPI] more than doubled their asset base," observes Norwood. Once the deal meets assorted securities commission and government regulatory approvals, he adds, FPI should generate a healthy cash flow of about $100 million annually.

The test of the merger, though, will be FPI's performance under a more aggressive yet proven management, albeit with a CEO who has never had to answer to shareholders. Risley admits running a public company isn't his first choice. "The comfort factor in Clearwater buying FPI would have been, 'Well it's my business, I control it, it's my debt and anybody who doesn't like it can kiss my ass,'" he says. On the other hand, if he actually raises FPI's stock and share price, as one of the biggest shareholders, he could become the main beneficiary. And he's never been shy on that point: "Do I want to make money for myself? You're damn right I do."

Copyright © 2001 Financial Times Limited - All Rights Reserved

How John Risley took control of FPI