Investors had reason to cheer when Chiquita Brands (UNKNOWN:CQB.DL) made a $1.07 billion, all-stock offer to buy Dublin-based tropical-fruit company Fyffes.
The easy metaphor to go for is that Chiquita wanted to be top banana in the industry. Already the market leader with a 13% share, buying Fyffes would give Chiquita control over nearly one-fifth of the banana export market, putting it well ahead of No. 2 Fresh Del Monte Produce (NYSE:FDP) with 12% and No. 3 Dole Foods at 11%.
So it's understandable why investors pushed Chiquita's stock almost 18% higher in the days following the deal's announcement, but what might not be so clear is why someone else would want to throw a roadblock in front of it and try to acquire Chiquita for themselves.
Slipped on a banana peel
Over the past decade, Chiquita has suffered the greatest loss of marketing muscle, losing almost half of its share as small independent producers entered the market. Even today the banana industry is in the grips of a pitched battle between the multinationals and the smaller outfits that have sprung up.
According to the industry trade site Banana Link (yes, there is an organization called that), Chiquita, Fresh Del Monte, and Dole at one time controlled nearly two-thirds of the market, but by the end of last year their influence had been cut to a little more than a third, with Chiquita falling hardest and losing almost half of its share. Fresh Del Monte dropped from 20% and Dole from 16% (Fyffes actually increased its share from 4% to 6%).
The hard-hitting nature of the fruit business was enough to cause another fruit company, Del Monte Foods, arguably best known for its pineapples, to sell off fruit business last year for $1.68 billion to Philippines-based Del Monte Pacific, choosing to focus solely on pet food products.
Del Monte Foods, which shouldn't be confused with Fresh Del Monte Produce, as it was that company's parent prior to a spinoff, once held the largest share of the canned fruit market in the U.S. Today it sells dog food.
Yes, we have no bananas
Chiquita restructured itself in 2012 to focus primarily on bananas and salads, generating $537.3 million from in the second quarter of 2014, or 65% of its total revenue. The yellow fruit accounted for 85% of its operating profitsl. It sold $2 billion worth of bananas in 2013, though that was down 0.8% from 2012, which itself was down 2% from 2011.
That fading power underscores why Fyffes, one of the few big banana producers actually growing, is essential to Chiquitas future.
Even so, Chiquita maintains the No. 2 market position in bananas in North America, holds the top spot in U.S. supermarkets, and imports more than one-fourth of the bananas on the market today. In Europe it's the brand leader and can charge a premium for its fruit.
For its part, Fresh Del Monte Produce saw total banana revenue growth of 8% in the second quarter, with revenue reaching $436.9 million, though that was helped along by a 2% price increase. Dole, which slices and dices all kinds of fruit, trumpets that it is "the world's largest producer and marketer of high-quality fresh fruit and fresh vegetables."
Bending over backward
The deal to buy its rival would result in a new company to be called ChiquitaFyffes. It was originally structured so that Chiquita investors would own 50.7% of the company and Fyffes shareholders would get 49.3%. Because the geographies of the two companies don't overlap, and there is plenty of competition from other companies, Chiquita never felt there would be any antitrust concerns.
But there could be a problem with the deal as a tax inversion.
Inversions, when U.S. companies skip town for countries with lower taxes, have become a touchstone of controversy since the Chiquita-Fyffes deal was announced. Originally one of the first deals this year in which the American company said it would switch country headquarters, numerous other, bigger merger proposals have since followed suit, and now politicians are hopping mad (note to pols: be mad at the U.S. corporate tax structure causing them to flee, not the companies themselves).
Analysts acknowledge the tax savings would be minimal from the deal, and Chiquita says they weren't a factor in its decision -- even though Ireland's corporate income tax rate is just 12.5% compared to 35% in the U.S. Nonetheless, the political fallout from the growing indignation of companies effecting such maneuvers could derail the deal, and shares of Chiquita began falling, actually dipping well below the price they traded at before the company offered to buy Fyffes.
Juicing the deal
This development also provided the needed wedge for someone new to step in.
Brazilian orange juice maker Cutrale Group and banking conglomerate Safra Group offered in August to buy Chiquita for about $625 million, and the banana producer's shares surged 30% on the news. Even the influential proxy firm Institutional Shareholder Services recommended investors support the new bid over the acquisition.
While Chiquita has rejected the offer, it used it to force Fyffe's to sweeten the pot. By delaying a shareholder vote on the merger until Oct. 24, Chiquita made Fyffe lower the ownership stake it would accept in the merged entity: Instead of a near 50-50 split, Fyffe's would retain a 40.4% stake, while Chiquita shareholders would get a 59.6% interest in the new company, almost 20% more value than previously allowed.
It's not expected to be a done deal, though. Analysts suspect Cutrale-Safra could still realize value if it raised its offer to about $16 or $17 per share.
While ISS has supported the counteroffer from the Brazilian groups, Cutrale says it's looking to diversify its own assets (it controls a third of the $5 billion orange juice market) and wants Chiquita to invest more in salads. It has suffered from falling global sales of orange juice and an outbreak of "greening" disease that has reduced U.S. production.
Bananas, OJ, and salads makes for a heckuva breakfast, but I'm not certain what kind of investment opportunity it would create. The Chiquita-Fyffes deal seems more synergistic and combines two strong companies together to focus on a single purpose.
Cutrale Group and Safra Group might be agitating for a change, but it's not one I'm sure investors ought to accept.