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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

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

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 Chiquitabranded 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

1
2

OSIRIS Database, 2014


United Nations Conference on Trade and Development, 2011

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

OSIRIS Database, 2014


Import duties for bananas imported into the EU from latin American countries.
5
United Nations Conference on Trade and Development, 2011
6
Marketwatch.com, 2014
7
Marketwatch.com, 2014
8
Evans and Gordon, 2011
4

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%9 of 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.

Bananalink, 2013
BBC.com, 2014
11
Evans and Mock, 2014
12
Fortune, 2014
10

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

13

Athavaley, 2014
Financial Times, 2014

14

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,15 which 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.

15

Global3Digital.com, 2014

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.

3.2 Vertical integration


All of the tropical food producers are highly vertically integrated.16 They 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 power when 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
16

BananaLink, 2014
BananaLink, 2014
18
Gelles and Strom, 2014
17

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.19 Together, 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

19

Global3digital.com, 2014
Global3digital.com, 2014
21
In 2007, a guerilla war in Colombia threatened one of Chiquitas most profitable subsidiaries. For more
information see: Evans and Mock, 2014
20

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.

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 nonAfrican-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.

22

HelgiLibary, 2014
WolframAlpha, 2014

23

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.

24

sec.gov, 2014

6. References
Osiris Database (2014). Publicly listed companies. [Online] Available from:
https://osiris.bvdinfo.com/version2014107/home.serv?product=osirisneo
21st October 2014]

[Accessed:

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 of
Value Destruction. [Online] Available from:
http://www.marketwatch.com/story/cutrale-safra-says-chiquita-board-continues-itstrack-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]

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-chiquitabrands-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-ab8600144feabdc0.html#ixzz3GaSVpNCv [Accessed: 20th October 2014]

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


from:
http://ww7.global3digital.com/fyffesplc/dlibrary/panda/Fyffes-InvestorPresentation.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-producedistributor-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]

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]

7. Appendix
Appendix 1 Development of EBIT for Chiquita and Fyffes 2010 2013
FYFFES PUBLIC
LIMITED COMPANY
2013
EBIT margin
2012
EBIT margin
2011
EBIT margin
2010
EBIT margin

CHIQUITA BRANDS
INTERNATIONAL INC

2013

2013

3.61
2012

1.47
2012

3.39
2011

-7.14
2011

1.94
2010

0.95
2010

1.39

3.43

Source: Osiris Database, 2014

Appendix 2 Development of ROE for Chiquita and Fyffes 2010 2013


FYFFES PUBLIC
LIMITED COMPANY
2013
ROE using Net income
2012
ROE using Net income
2011
ROE using Net income
2010
ROE using Net income

Source: Osiris Database, 2014

CHIQUITA BRANDS
INTERNATIONAL INC

2013

2013

17.21
2012

-4.22
2012

17.43
2011

-109.35
2011

8.36
2010

7.10
2010

5.20

7.75

0,00

Source: Osiris Database, 2014

Sep. 14

Aug. 14

Juli 14

Juni 14

Mai 14

Apr. 14

Mrz 14

Feb. 14

Jan. 14

Dez. 13

Nov. 13

Okt. 13

Sep. 13

Aug. 13

Juli 13

Juni 13

Mai 13

Apr. 13

Mrz 13

Feb. 13

Jan. 13

Appendix 3 Operating Income from Bananas for Chiquita

Source: Bloomberg, 2014

Appendix 4 Stock price of Fyffes

Market Prices FYFFES

1,40

1,20

1,00

0,80

0,60

0,40

0,20

Appendix 5 Stock price of Chiquita

Market Prices CHIQUITA


16,00
14,00
12,00
10,00
8,00
6,00
4,00

Sep. 14

Aug. 14

Juli 14

Juni 14

Mai 14

Apr. 14

Mrz 14

Feb. 14

Jan. 14

Dez. 13

Nov. 13

Okt. 13

Sep. 13

Aug. 13

Juli 13

Juni 13

Mai 13

Apr. 13

Mrz 13

Feb. 13

0,00

Jan. 13

2,00

Source: Osiris Database, 2014

Appendix 6 Percent Changes of Stock prices for Chiquita and Fyffes


Percent'Changes'of'Market'Price'
50,0%&

40,0%&

30,0%&

20,0%&

10,0%&

0,0%&
Jan.&13& Feb.&13& Mrz&13& Apr.&13& Mai&13& Juni&13& Juli&13& Aug.&13& Sep.&13& Okt.&13& Nov.&13& Dez.&13& Jan.&14& Feb.&14& Mrz&14& Apr.&14& Mai&14& Juni&14& Juli&14& Aug.&14& Sep.&14&

!10,0%&

!20,0%&
Fyers&

Source: Osiris Database, 2014

Chiquita&

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

Appendix 9 Industry Analysis for bananas (Porters Five Forces)

Bargaining Power of
Customers
Large Number of customers
Low cost of switching
Big order sizes
5 big supplying firms
Customers (Supermarkets) are sensible to price

Rivalry
Oligopoly between few big competitors
Difficult product differentiation (commodities)
Price War
Demand unpredictable danger of oversupply

Bargaining Power of Suppliers


Low Cost of switching suppliers
Volume is critical to suppliers
Inputs have little impact on costs
High competition among suppliers
Many small and unorganized suppliers

Threat of new Competitors


High Costs Investing into supply chain
Almost no product differentiation
Industry requires economies of scale
Strong brand names are important
Strong distribution network required

Threat of substitutes
Fairtrade or Organic Bananas
Banana is the most eaten fruit
Source: Self-made