Glenboden M & A Originations

Rationale for global fresh produce merger of Chiquita and Fyffes

Priority Rating priority rating 4
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Origination Status trading announcement by Fyffes management, January 2009
Asset Fyffes plc (Ireland), leading European importer and distributor of tropical fruit
Buyer Chiquita Brands Inc (USA), leading international distributor of bananas and salads
Seller shareholders of Fyffes (listed on EIX Dublin and AIM London)
Buyer Rationale market leadership and growth in Europe, global critical mass, timing
Seller Rationale pricing and margin pressures, growth and cashflow concerns in mid-term
NBs Fyffes is globally no. 4, 3 and 2 in bananas, pineapples and winter melons (respectively)
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In the middle of 2008, after its divestment of Atlanta Univeg in Germany, Glenboden predicted that Chiquita is gradually readying itself for a major acquisition. With continued improvement in its profitability and debt reduction in Q3 2008, we think the time is getting closer. Given global cost pressures in the banana business, and Chiquita’s relative success in that segment compared with its troubled salads division, we think the obvious acquisition target for the group is Fyffes, which would greatly strengthen Chiquita’s position in the important European tropical fruit market.

Earlier we tipped Bakkavor and Greencore, in the UK and Ireland, as prime acquisition candidates for Chiquita. Both would greatly enhance the group’s value-added business in salads and healthy snacks, and both are facing financial difficulties especially Bakkavor.

However, in YTD Q3 2008 the salads part of Chiquita’s operations booked an operating loss of over $ 10 mln, compared with a profit of $ 15 mln the previous year; it therefore seems unlikely that Chiquita could justify an acquisition in value –added products, before putting its existing salads business into better order.

Quite by contrast, Chiquita’s principal business, that of import and distribution of fresh bananas, booked a 13% increase is sales in YTD Q3 2008, to reach over $ 1,5 bln, as well as a more than doubling of operating profit to $ 170 mln. Performance was particularly strong in north America, where the group achieved a 35% increase in banana prices and a 3% growth in volume.

The picture was less rosy in Europe, however, where Chiquita’s banana sales saw a price fall of 6% and a volume decline of 4%. Since Europe delivers 35% of the group’s total banana volumes, and banana sales make up 60% of Chiquita’s overall sales revenue, this is clearly a major problem for the group. A quick –fire solution would be to acquire Fyffes of Ireland, Europe’s no.2 banana marketer; the timing might be favourable for that, given the pressures currently being felt by Fyffes.

Fyffes recently warned that its operating profit for FY 2008, on an adjusted basis, would be only about € 15 mln, meaning no increase on the number booked for H1 2008. The main problem seems to be barriers faced in passing increased raw material costs, caused by the appreciation of the US$ in which tropical fruit is priced, onto the consumer in the form of higher banana, pineapple and melon prices.

In total, Fyffes estimates input costs to increase by 20% in 2008. Unless this pricing issue improves, the group will have difficulty in achieving its target of doubling turnover in the five years to 2011. Acquisitions, which were to deliver 75% of that growth, already seem to have slowed down.

On top of that, the group is predicting a big decrease in its cash balance; it also has yet to recognize a potential loss of over € 50 mln resulting from impaired value at an affiliated company, Blackrock.

Fyffes still enjoys a net cash position, and so is unlikely to be under financial pressure to sell now. On the other hand, the strategic rationale behind a merger of Chiquita and Fyffes is now stronger than ever.

The combined operations would have a much stronger bargaining position in the global banana trade, especially in Europe. Through the tie-up, Chiquita could solve its European growth problem; at the same time Fyffes would get the pricing clout that it currently lacks. The synergy potential is also huge on the cost side. In fact, the main obstacle to the deal is likely to be anti –monopoly clearance.

On the all –important deal financing side, Chiquita has managed to both increase EBITDA and reduce debt in YTD Q3 2008; we estimate its net debt to EBITDA ratio to be under 3,0 for FY 2008.

At the same time, Fyffes does not have net debt, which would allow its equity valuation to be more attractive to shareholders; perhaps even attractive enough for a deal to go ahead, in spite of the current environment.

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THIS LEAD'S VALUATION
Size (€ mln) 300
Sector fresh produce
Asset Quality Europe no.2 branded
Seller mid-cap plc
Buyer large plc
P/S 0,5
P/Ebitda 15,0
Type value estimate
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