team 6 case analysis chiquita

8/10/2019 Team 6 Case Analysis Chiquita

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Firms and Industries

Chiquita and Fyffes merger

Master in Management

Thomas Diwo

Rick Geurten

Ma. Camila Gutirrez

Philipp Seifert

Armand Taher


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Table of content

1. Banana market ........................................................................................................... 3

1.1 Chiquita Brands ...................................................................................................... 3

1.2 Fyffes ...................................................................................................................... 3

1.3 The Cutrale Group .................................................................................................. 4

1.4 The Safra Group ..................................................................................................... 4

2. Merger Chiquita and Fyffes ....................................................................................... 5

3. Benefits of the merger Chiquita and Fyffes............................................................... 7

3.1 The perfect match ................................................................................................ 7

3.2 Vertical integration .............................................................................................. 8

3.3 Horizontal integration .......................................................................................... 8

4. Future markets ......................................................................................................... 11

5. Recommendations and conclusions ......................................................................... 12

5.1 Recommendations ................................................................................................ 12

5.2 Conclusions .......................................................................................................... 12

6. References ............................................................................................................... 13

7. Appendix ................................................................................................................. 16


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1. Banana market

1.1 Chiquita Brands

Chiquita, incorporated 1899 and based in the United States of America, is an

international marketer and distributor of bananas and other fresh products, sold in 70

countries. It is the main banana distributor in the U.S. The company operates in three

business segments: Bananas, Salads and Healthy Snacks, and other fresh fruits and

vegetables. Bananas include the sourcing (purchase and production), transportation,

marketing and distribution of bananas. Salads and Healthy Snacks include ready-to-eat,

packaged salads, such as healthy snacking products, fresh vegetable and Chiquita-

branded fruit smoothies in Europe. Banana sales amounted to 64% of its consolidated

net sales in 2011. In North America, it often sells bananas and related services under

one-year contracts to national and regional grocery retailers. In Europe and the

Mediterranean, its customers are grocery retailers, ripeners and wholesalers. Its other

international markets are primarily in Russia and the Middle East.1

Chiquita has followed a conservative market strategy by focusing on the brand element,

disregarding possible strategic alliances with highly influential operators in the EU, as

other transnational companies have done.2

1.2 Fyffes

Fyffes, founded in 1888 in Ireland, is one of the largest marketers and distributors of

tropical produces globally. The group is primarily involved in the production,

procurement, shipping, ripening, distribution and marketing of bananas, pineapples and

melons. It currently markets fruits in the United States and in Europe, where it is one of

the main suppliers of bananas. Apart from bananas the company is one of the main

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suppliers of melons and pineapples to the US and European market.3Fyffes started to

reduce their high dependence on bananas earlier than Chiquita did, and its product

portfolio is wider than Chiquitas. Furthermore, Fyffes moved to other producing areas

in order to benefit from the EU Banana Regime4 by getting access to the importing

licenses.5

1.3 The Cutrale Group

The Cutrale Group collectively makes up one of the most highly regarded companies in

agribusiness and production of juice in the world. The group accounts for over one-third

of the US$5 billion orange juice market. The global business operations of the entities

within the Cutrale Group include oranges, apples, peaches, lemons and soybeans. The

operations of the Cutrale Group entities have a vast network and knowhow of farming,

processing, technology, sourcing, distribution, logistics, and marketing of juices and

fruits.6

1.4 The Safra Group

The Safra Group is a financial institution that manages over US$200 billion in assets

and aggregates stockholder equity of approximately US$15.3 billion. They operate in

banks and invest in other businesses across the globe. Throughout these markets, the

Safra Group has deep, long-term relationships with major market participants, enabling

the Group to greatly enhance the value of the competitive position of the businesses.7,8

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2. Merger Chiquita and Fyffes

In March 2014, Chiquita announced a merger with Fyffes and stated that the Board of

Directors had agreed on it. The process will involve a stock for stock transaction with

Chiquita shareholders holding approximately 50,7% of the merged companies.

The merger will create the largest banana producer in the world with an approximated

market share of 29%9of the global banana trade.10

The new company, named ChiquitaFyffes, will have projected annual revenues of

US$4.6 billion and will be domiciled in Ireland but listed on the New York Stock

Exchange. Being domiciled in Ireland allows the merged companies tax savings.

The EU approved the ChiquitaFyffes merger, stating that even though the merger would

create the worlds largest banana company, it wouldnt hamper competition in the EU

because consumers would still have a significant number of other banana suppliers to

choose from.11

Fyffes is not the only one bidding on Chiquita. Cutrale and Safra joined forces and

made a bid of US$625 million in August 2014, which would represent US$13 per share

in cash. This would equal a 29% premium to Chiquitas market price to that time. The

offer was rejected by Chiquita, stating that it will continue with the Fyffes merger.12

Due to this bidding competition, the stock prices of Chiquitas shares went up. This

increment in stock price showed investors that the company was worth more than

US$13 per share and investors saw potential in Chiquita stocks and therefore they

were going up.

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Chiquitas board of directors estimated that ChiquitaFyffes stock value would range

from US$15.46 to US$20.0113.

The Chiquita management is trying to lock in the Fyffes deal. The shareholders are

asked to vote for the merger with Fyffes on 24th of October. The Cutrales & Safras

offer will expire on the 26th of October. On the 28th of October, the shareholders of

Fyffes will meet to vote about the deal.14

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3. Benefits of the merger Chiquita and Fyffes

3.1

The perfect match

Fyffes has proved to be a great match for Chiquita Brands. It is a well-recognized and

international fruit company with a sound reputation and history in the business. It was

owned by United Fruit Company, the predecessor of Chiquita until 1986. Therefore,

both companies share a history and have a deep understanding of each other.

Furthermore, Fyffes was able to generate a strong EBIT and ROE in recent years,

whereas Chiquitas were moderate or negative. In fact, Fyffes EBIT and ROE were

permanently increasing from 2010 2013 (appendix 1 and 2). Over the same years,

Chiquita was not able to sustainably outperform Fyffes EBIT, instead it has been very

volatile and in 2012 significantly negative. The same accounts for Chiquitas ROE.

In addition to the recent operational profits, Fyffes has a successful growth history

based on mergers and acquisitions,15which led us to believe, that this merger is not an

improvised offer, but a well thought decision. It is very likely to be a success, taking

into account their previous business experiences and results.

Fyffes has a strong position in Europe, a market in which Chiquita has been interested

in growing.

Finally, Fyffes has a deep knowledge and understanding of the banana market, which is

Chiquitas main product. This know-how is very important to guarantee the success of

the merger because after all, it is the banana sales that will account for the majority of

their revenues.

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The merger of these two companies will bring many benefits that will ultimately

translate in more value for the shareholders. In the following pages we will discuss the

aforementioned benefits.

3.2Vertical integration

All of the tropical food producers are highly vertically integrated.16They have a long

supply chain, ranging from the cultivation of plants to the final distribution to

wholesalers and retailers. Since the extent of the vertical integration of Chiquita and

Fyffes is approximately identical, a merger would be reasonable. The companies

activities perfectly complement each other. A common cultivation, as well as shipping

system for import and export, grants the possibility of large cost saving.

3.3

Horizontal integration

When merging, both companies could benefit of horizontal integration, due to the

economies of scales and scope that could be reached. As a merged company,

ChiquitaFyffes would become the worlds biggest banana producer and seller, with an

estimated market share of 22% based on data of 2013.17

As a result, this merger will potentiate the bargaining powerwhen facing suppliers. For

example: when negotiating the purchase of pesticides and agricultural equipment, the

new company would be able to buy at lower prices, because of large order discounts.

Moreover, the consolidation and expansion of wholesalers and retailers recently

strengthened their position18 and therefore are able to keep their purchasing prices for

bananas low. This is eroding the profitability of the whole banana industry, including all

the banana producers and not just the two companies that want to merge. Chiquitas and

Fyffes answer to this threatening development is the merger, which will improve their

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negotiation power towards the wholesalers and retailers. Because of their combined

firm size, they would be able to obtain better prices when selling bananas. Their fusion

leads to a fewer number of banana suppliers, which puts the buyers under pressure.

Additionally, ChiquitaFyffes will have fewer contracts with their customers, which can

lower transaction costs.

Another important benefit for the merger of Chiquita and Fyffes is their regional

diversification of the markets they are exporting to. Chiquita mainly operates in the US

and partly in Europe, whereas Fyffes focuses greatly on Europe and to a lower extent on

the US.19Together, both companies would perfectly complement each other, serving the

both markets in equal terms20. The impact of lower demand in one region would be

lessened for a company that is as active as ChiquitaFyffes would be with strong market

positions in the US and Europe. What is more, both companies produce and sell more

types of tropical fruits than just the banana, enabling them to bypass a banana crisis

more effectively.

Both companies are cultivating in Central and South America. This geographical

proximity at an agricultural level offers several benefits. First,both are cultivating in

many countries across America and distribute its products to America and Europe. Crop

failures and the impact of local wars21 can be cushioned because of the many

comprehensive production locations. Second, it facilitates the allocation of resources,

such as inventories, use of plantation and capital. There may be a lot of optimizing

potential. This could result in more efficiency in all the corresponding activities and

eventually in lower operating costs. Third, it enables them to join their distribution

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network. If they do so, they eliminate, for example, the duplication of shipping efforts.

As a result, costs of distribution can be lowered. It would be impossible to benefit from

all these options if one company cultivates and exports in America and the other one in

Africa. In the latter case, horizontal integration cannot be exploited. Since this is not the

case, huge cost savings are likely to be achieved. Chiquita estimated combined cost

savings of US$40 million by the year 2016.

Another aspect that offers great benefits is the moving of Chiquitas headquarters to

Ireland, where Fyffes is already resident. The merger would benefit from this

reallocation in three ways. First, ChiquitaFyffes would save taxes in the long run

because Irelands taxation is friendlier than the US. At first sight, this argument is not

very compelling because Chiquita didnt pay taxes in recent year due to their losses. But

as soon as ChiquitaFyffes will make profits, the tax savings in Ireland will take effect

though. This possibility provides significant potential for reducing costs on a long term

perspective. Second, one extensive headquarter (instead of two) generates scales of

scope, because administration costs of the combined company can be lowered by

centralizing activities. Third, the senior managers of both companies are highly

experienced and share common goals of cost efficiency. Working together will

influence the industry dynamics thanks to the synergies of highly developed

management skills in combination with ChiquitaFyffes as the market share leader.

In conclusion, a merger of Chiquita and Fyffes brings many benefits in the form of

vertical and horizontal integration, which will lead to a better bargaining power,

diversification of risks, cost saving, a better allocation of resources, a greater efficiency

tax saving and a synergy of management skills.


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4. Future markets

The banana market in the future provides a good outlook. The ending of the European

tariff war, which reduces the import tariff imposed on bananas imported from non-

African-Pacific-Caribbean countries, provides a favorable opportunity for higher profits

in the big European banana market. The merger with Fyffes, one of the main suppliers

of bananas in the EU, puts Chiquita in the best possible position to exploit these

benefits.

Overall banana consumption, especially in emerging countries is growing slowly but

steadily. For example Russia had a 34% and China a 21% growth of banana

consumption from 2009 to 201122. Forming the worlds biggest banana distributor

provides ChiquitaFyffes with the necessary capital and market position to be able to

move into these growing markets.

The European market itself provides further possibilities for substantial growth, because

some countries have considerable low banana consumption per capita. On average 8kg

of bananas per capita were consumed in the EU in 2009. On the low end of the

consumption are Poland with 2.1kg, the Netherlands with 3.9kg and France with

4.2kg23, leaving plenty of room for further growth.

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5. Recommendations and conclusions

5.1 Recommendations

As we have argued in the previous chapters, we strongly believe that the best option for

Chiquitas shareholders is to accept Fyffes final offer and reject the Safra and Cutrale

one. We recommend Chiquitas shareholders to vote in the upcoming meeting in favor

of the merger with Fyffes in order to achieve a higher value for their capital.

5.2 Conclusions

This merger will affect both companies on big scale. The combined forces will create a

US$4,2 Billion in annual revenues and will be the number one global banana and other

fresh produce company.24

Financially, we expect ChiquitaFyffes to make profits from the first year on, and these

profits only will grow when import taxes in Europe start to decline significantly over

the next few years. We strongly believe that the merger will create superior value to

Chiquita and will ensure a future stock price between US$15.46 to US$20.01 as

forecasted by Chiquitas board of directors.

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6. References

Osiris Database (2014). Publicly listed companies. [Online] Available from:

https://osiris.bvdinfo.com/version2014107/home.serv?product=osirisneo [Accessed:

21st October 2014]

United Nations Conference on Trade and Development (2011). The Banana Market.

[Online] Available from:

http://www.unctad.info/en/Infocomm/Agricultural_Products/Banana/Companies/

[Accessed: 21st October 2014]

Market Watch (2014). Cutrale-Safra Says Chiquita Board Continues its Track Record ofValue Destruction. [Online] Available from:

http://www.marketwatch.com/story/cutrale-safra-says-chiquita-board-continues-its-

track-record-of-value-destruction-2014-10-17 [Accessed: 20th October 2014]

Evans, A. and Gordon, R. (2011). Analysis of U.S. Market for Organic and Fair-trade

Bananas from the Dominican Republic. [Online] August 2011.

http://www.mdgfund.org/sites/default/files/PS_STUDY_RDominican_Analysis%20of

%20US%20Market%20for%20Organic%20and%20Fair-trade%20Bananas.pdf

[Accessed: 23rd October 2014]

BananaLink (2014). From plantation to retailer. [Online] Available from:

http://www.bananalink.org.uk/content/companies [Accessed: 22nd October 2014]

BBC.com (2014). Fyffes and Chiquita to create biggest banana firm. [Online] Available

from: http://www.bbc.com/news/business-26511507 [Accessed: 20th October 2014]

Evans, P. and Mock, V. (2014). Chiquita and Fyffes to Merge, Creating New Global

Top Banana. The Wallstreet Journal. [Online] 10th March 2014.

http://online.wsj.com/news/articles/SB100014240527023047045045794304901672679

28?mg=reno64-wsj [Accessed: 22nd October 2014]


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Fortune (2014), Cutrale, Safra go bananas with Chiquita takeover offer. [Online]

Available from: http://fortune.com/2014/08/11/bid-unveiled-for-chiquita/ [Accessed:

20nd October 2014]

Athavaley, A. (2014) Cutrale-Safra ups Chiquita offer ahead of Fyffes vote.[Online] 23

October 2014. Available from: http://www.reuters.com/article/2014/10/23/us-chiquita-

brands-m-a-cutrale-safra-idUSKCN0IC1Q020141023 [Accessed: 23rd October 2014]

Financial Times (2014) Banana group Fyffes offers Chiquita bigger slice of merger

deal. [Online] Available from http://www.ft.com/cms/s/0/32bdc97a-4546-11e4-ab86-

00144feabdc0.html#ixzz3GaSVpNCv [Accessed: 20th October 2014]

Global3digital (2014)Investor Presentation. [Online] 17th September 2014. Available

from: http://ww7.global3digital.com/fyffesplc/dlibrary/panda/Fyffes-Investor-

Presentation.pdf [Accessed: 22nd October 2014]

Gelles, D. and Strom, S. (2014) Chiquita Buys Irelands to Go Global in Banana

Business. The New York Times. [Online] 10th March 2014. Available from:

http://dealbook.nytimes.com/2014/03/10/chiquita-to-buy-irish-fruit-and-produce-

distributor-fyffes-in-all-stock-deal [Accessed: 24th October 2014]

Global3digital (2014) Creating a Leading Global Produce Company. [Online] 10th

March 2014. Available from:

http://ww7.global3digital.com/fyffesplc//uploads/finreports/ChiquitaFyffes_IR_Present

ation_100314.pdf [Accessed: 22nd October 2014]

HelgiLibary (2014) Banana Consumption Per Capita. [Online] Available from:http://www.helgilibrary.com/indicators/index/banana-consumption-per-capita

[Accessed: 22nd October 2014]

WolframAlpha (2014) Banana consumption Europe per capita. [Online] Available

from: http://www.wolframalpha.com/input/?i=banana+consumption+europe+per+capita

[Accessed: 22nd October 2014]


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Sec.gov (2014) Chiquita mails letter to shareholders. [Online] 27th August 2014.

Available from:

http://www.sec.gov/Archives/edgar/data/101063/000114420414052620/v387832_425.h

tm [Accessed: 23rd October 2014]


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7. Appendix

Appendix 1 Development of EBIT for Chiquita and Fyffes 2010 2013

FYFFES PUBLIC

LIMITED COMPANY

CHIQUITA BRANDS

INTERNATIONAL INC

20132013 2013

EBIT margin 3.61 1.47

20122012 2012

EBIT margin 3.39 -7.14

20112011 2011


20102010 2010


Source: Osiris Database, 2014

Appendix 2 Development of ROE for Chiquita and Fyffes 2010 2013

FYFFES PUBLIC

LIMITED COMPANY

CHIQUITA BRANDS

INTERNATIONAL INC

20132013 2013

ROE using Net income 17.21 -4.22

20122012 2012

ROE using Net income 17.43 -109.35

20112011 2011

ROE using Net income 8.36 7.10

20102010 2010

ROE using Net income 5.20 7.75



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Appendix 3 Operating Income from Bananas for Chiquita

Source: Bloomberg, 2014

Appendix 4 Stock price of Fyffes


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Appendix 5 Stock price of Chiquita


Appendix 6 Percent Changes of Stock prices for Chiquita and Fyffes


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Appendix 7 Market shares of selected companies in global banana exports

Source: Banana Link, 2014

Appendix 8 Supply chain of banana producers

Source: Evans and Gordon, 2011


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Appendix 9 Industry Analysis for bananas (Porters Five Forces)

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