In the one race that mattered, Wynnefield’s nominee Michael Christodolou won in a landslide against incumbent board member Gary Ermers, who was backed by Omega Protein’s management team. In an earlier concession to the shareholders backing Wynnefield’s point of view, Omega Protein had accepted Wynnefield’s nominee David Clarke, who was also elected unopposed on Tuesday. Also elected to the board was current CEO Bret Scholtes.
Strategic disagreement
The election at Omega Protein’s annual meeting is the culmination of a struggle over the company’s strategic direction. Omega Protein is first and foremost a fishing company concentrating on the harvest of menhaden, a short lived forage fish species, in the Atlantic Ocean in and near Chesapeake Bay and in the Gulf of Mexico. For many years the company used this harvest to produce fish meal and fish oil, which was sold primarily as animal feed. Starting in 2010 and accelerating under the leadership of Scholtes, Omega Protein has sought to diversify its revenue streams by expanding into human nutrition markets and to derive higher value products from the resources at hand. The stated reason has been to become less dependent on the menhaden harvest, which is a naturally fluctuating resource. This was done by refining an omega-3 fish oil ingredient for dietary supplements as well as acquiring companies supplying other ingredients, such as Cyvex in botanical ingredients, Wisconsin Specialty Protein in the whey market and Bioriginal in lipid ingredients including those sourced from coconut. This strategy had showed signs of strain earlier this year when Omega Protein announced it was abandoning an attempt to market higher concentrations of its omega-3 oils.
Wynnefield and Nelson Obus, one of the principals of the firm, have alleged that that process has been mismanaged. Omega Protein has spent more than $168 million on the human nutrition acquisitions and has little to show for it, Wynnefield has alleged.
“We firmly believe that as independent Directors, Michael Christodolou and David Clarke will work collegially and collaboratively with Omega’s Board and the management team to serve the best interests of all stockholders. We strongly urge Omega’s incumbent Directors to heed the mandate of stockholders and to work collegially with Mr. Christodolou and Mr. Clarke to critically evaluate the Company’s strategy and capital allocation, and to improve corporate governance practices,” Obus said.
Unraveling where it went wrong
A spokesman for Wynnefield, which at the moment owns more than 7% of Omega Protein’s stock, emphasized that the directors, though put forward by Wynnefield, are independent and private communications between them and Wynnefield would cease. Nevertheless, he was willing to lay out a broad outline of what the next steps for the company might be. He said it’s unclear why the foray into human nutrition has stumbled, but with that being said, Wynnefield has maintained for some time that there are brighter opportunities in the animal nutrition markets, a business with which Omega Protein is already familiar. Wynnefield has also questioned the acquisition of businesses in sectors where there are already a number of firmly entrenched competitors, such as in the whey and oil-based ingredient markets.
“We don’t know if it’s a question of bad capital allocation, or a matter of a good idea that has not been integrated correctly,” he said. The next order of business for the new board will be to comb through the books to figure that out, he said.
“What we would say is that that the gross margin in animal nutrition is 39.5%, and the gross margin in human nutrition is about 12.5%,” he said. “In whey or in coconut oil, they have major competitors that have tremendous leverage on the buy side. The human nutrition operating losses have been increasing.”
In a statement, Omega Protein board chairman Gary R. Goodwin, said, "We appreciate the input from our stockholders and expect to maintain a dialogue with them as we continue to focus our attention on producing superior stockholder returns. We welcome Mr. Clarke and Mr. Christodolou to the board and look forward to working with them for the benefit of all stockholders."