Brazilians have firepower to scupper Fyffes’s Chiquita merger

Four months ago, when Fyffes’s $1 billion merger with its US banana rival Chiquita was announced, David McCann, the Irish company’s chief executive, must have felt as if he was walking on water.

Fyffes, much smaller than its proposed merger partner, had secured by far the better outcome from the deal through its healthier balance sheet – it was to get almost 50 per cent of the equity, the corporate headquarters for Dublin and the top three management jobs at the combined entity, ChiquitaFyffes.

McCann, scion of one of Ireland’s best-known business families, was to become chief executive of the biggest banana company globally. By the end of the year, he would be a major international corporate player with significant clout on both sides of the Atlantic.

On Monday, the game changed. McCann’s plans were thrown into disarray by the arrival on the scene of a pair of behemoths.

Companies backed by Brazilian billionaires Joseph Safra, a banking magnate, and Jose Luis Cutrale, the biggest global player in orange juice, made a rival offer to buy Chiquita for $611 million in cold, hard cash.

Cleverly, the late bidders also pressed the politically charged “inversion” button.

They suggested in a letter to Chiquita’s board that the deal with Fyffes, which would have domiciled the new entity in Ireland for tax reasons, could fall foul of the climate of hostility in the US towards tax-driven “inversions”.

"How many times do you have a chance to buy a premium brand in a sector that doesn't have too many?" asked Sachin Shah, a strategist at US financial house Albert Fried and Co.

“Because you have the headline news with inversions, they’re basically saying, ‘Okay, if we’re going to do something, this is our chance’.”

Safra and Cutrale said they had delayed their bid until after the collapse of a court case – which happened earlier this month – taken by Colombians against Chiquita over its alleged past links to murderous right-wing paramilitary groups.

The bidders want an answer from Chiquita today.

What now for Fyffes and the merger with its US rival, which would have made McCann the first Irishman since the paper tycoon Michael Smurfit to run a listed company that is the king of its own world?

Safra and Cutrale have bid $13 a share for Chiquita, a 30 per cent premium to its share price before the bid. This week, however, Chiquita’s share price soared above this, indicating the markets believe the offer could rise further.

“It’s a good bid but I think Chiquita will try to get more,” said a source with knowledge of the Brazilian offer.

Fyffes’s share price has returned to where it was before the merger.

Chiquita, which has begun a review of the late bid, is considered unlikely to accede to Safra and Cutrale’s demand to announce a decision today. A “holding statement” buying it more time is considered more likely.

Eventually, however, it will have to choose whether to enter a steady marriage with a conservative Irish bride, or to jilt her at the altar in favour of Brazilians waving banknotes.

"Chiquita found a good merger partner in Fyffes and now the apple cart is being upset," said Kim Noland, a credit analyst at Gimme Credit in New York. "It is an ideal time for somebody to come in. The company is basically already in play. They already put themselves out there."

Noland believes the “strategic rationale” for the Chiquita-Fyffes merger – balance sheet efficiency and $40 million in annual savings – could be trumped by the attractive cash offer from Cutrale and Safra.

“It’s a bird in the hand today versus two in the bush,” she says. “You’re going to have people owning the shares now that believe they would rather have $13, preferably more, in cash as soon as possible.”

Fight it out

Chiquita could encourage both sides to fight it out. Fyffes has no debt to speak of and finished 2013 with net cash on its balance sheet of €400,000.

However it would take a monumental change of risk appetite to mount its own bid for Chiquita and it would struggle to finance it.

Safra has a net worth of about $15 billion, while Cutrale’s family is worth about $5 billion.

Fyffes has a market capitalisation of about €272 million and, while the McCanns are wealthy, they are not in even close to the same league as the Brazilians.

The rationale for the merger with Chiquita always seemed stronger for the US company, in any event. It was the one with debt problems; it originally approached Fyffes, it was the company most in need of strategic change.

Some analysts believe Fyffes will not be drawn into a battle.

"The chances of Fyffes competing with a cash offer are remote. ChiquitaFyffes's strategic position is based on the fact that it's a balance sheet story," says David Holohan, head of research at Merrion Capital.

“The ball is in Chiquita’s court. Its board must decide which option to recommend. If Chiquita comes out [today] and says it still prefers the Fyffes deal, I wouldn’t be surprised if Safra bid again.”

Analysts at BB&T this week suggested they expected Chiquita to reject the offer from Cutrale and Safra – even if it does not do so today – although it could leave the door open for another bid. If the price gets up to $15 or $16 a share, Fyffes’s prospects for a merger would be finished.

Chiquita “shareholders would probably like the company to be auctioned – I think that would yield the best result”, says Shah. “It’s up to the board to make sure that they literally shake the tree as much as possible to get the best offer.”

If the merger with Fyffes is abandoned and Chiquita does go to auction, Fresh Del Monte and PepsiCo are touted as possible rival bidders to the Brazilians.

As for Fyffes, Holohan believes it would go back to business as usual, for now. “If the merger with Chiquita fails, Fyffes will continue as an independent company and it will do well,” he said.

Some market observers have pondered that a newly single Fyffes could become a takeover target itself. When the political noise from "inversions" dies down in the US, the financial rationale for such deals will remain. Could a suitor like Dole, another of the big banana companies, come calling?

Holohan says Fyffes is not “financially vulnerable” due to its strong balance sheet – it has no debt worries that would force it into a deal with anybody.

Although it is listed on the stock exchange, it is also relatively tightly held by its shareholders. “About 45 per cent of its stock is held by its top four shareholders,” he said. The McCann family are prominent among them and are not considered sellers.

Total Produce

Holohan floated the idea that if a hostile bid did become a possibility for Fyffes, it could turn look to recombine with Total Produce for protection. The two companies split in 2007, when Fyffes spun off its fresh produce business to become almost purely a banana play.

If McCann ever wants to discuss remerging, all he must do is pick up the phone to his brother, Carl McCann, the chief executive of Total Produce.

“It’s a logical fit but it is unlikely in the near term, but if an external approach came for Fyffes, combining with Total Produce could be a way of defending itself,” said Holohan.

The proposed merger is unlikely to end today, but if Fyffes wants to keep it alive, it had better make a move soon.