Glenboden M & A Originations

Should Greencore acquire Chiquita's convenience food business ?

Priority Rating priority rating 3
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Origination Status proprietory origination, August 2009
Asset salads and healthy snacks business of Chiquita (USA)
Buyer Greencore plc (Ireland), leading international supplier of convenience foods and ingredients
Seller Chiquita Brands International Inc. (USA), no.1 global branded banana supplier
Buyer Rationale expansion in convenience food market in US, development of Chiquita brand in Europe
Seller Rationale focus on core produce business and strategic acquisitions
NBs value estimate based on sale of Marie convenience food (France) by Uniq
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Over the years we've suggested some m&a scenarios for Chiquita, as that company continues its slow path to financial recovery. We believe that the tectonic plates have shifted again, making the divestment of Chiquita's salads and healthy snacks business, to Greencore, a win-win move. Chiquita could then focus on its global produce business, and Greencore would capitalise on its growth momentum in the US.

Still struggling to regain profitability ...Chiquita's financial condition in FY2008 was rather poor (see chart). However, that picture turns to catastrophic if one adds the goodwill impairment charge of US$ 375 mln, taken at its Fresh Express subsidiary, which puts the group's EBITDA deeply into the red.

... with its value-added business the laggard ....Chiquita's salads and healthy snacks business constitutes about one-third of the group's total revenues; it appears to be underperforming.

That division's sales decline in H1 2009 was 15%, twice as deep as the group's total. Although in that period the business unit booked an operating profit, after a disastrous 2008, of over US$ 40 mln, that represents a margin of only 7%, when the core banana division delivered 13%.

Management insists that its salads and healthy snacks division is 'showing significant and sustainable profit improvement'. However, that's due to cost reductions and network efficiencies, not growth or premiumisation. Management also intends to invest in marketing and innovation, in that division; it's hard to justify that, in our view, given the unit's performance to date.

A better option for Chiquita might be to divest that problematic business, and focus on its core competence of bananas and other produce.

.... while bananas are performing well ...That division benefited from record pricing in Europe and sustained pricing in north America, in H2 2009, and its operating margin, at 13%, is not only high by produce standards, but is stable compared with the previous period. This all suggests that Chiquita's brand equity in bananas is strong.

... with acquisition optionsWe re-iterate our view that Chiquita should acquire Ireland's Fyffes, which is Europe's no.2 banana supplier. That group is suffering from high raw fruit prices; also its acquisition momentum, which has fuelled growth so far, has slowed.

A combination of Chiquita and Fyffes would have strong critical mass, in purchasing, as well as in sales in north America and Europe. With the growth of unbranded fresh produce sales, as a counterweight, the anti-monopoly considerations shouldn't be terminal

Chiquita's value-added business a good fit for Greencore ...Coming back to Greencore, we believe that the acquisition of Chiquita's salads and healthy snacks division presents an opportunity for it to fulfil its ambitions in the US convenience food market.

.... whose US business is burgeoning ...In 2007 Greencore acquired HMBF, the no.1 supplier of sandwiches and other key convenience food categories in north-east USA. With the capacity to increase sales from US$ 40 mln (2008) to US$ 100 mln, this provided Greencore with a platform that it has subsequently capitalised upon.

The group's US sales grew by 33% in H1 2009, and by 43% in Q3 2009; new products, including Weight-Watchers ready meals, were launched successfully.

... but has growth constraints for nowHowever, given the regionalisation of convenience foods in the US, in terms of customer relationships and consumer meal preferences, Greencore will need to make further acquisitions if it's to expand beyond north-east USA.

Chiquita provides that opportunity. After its acquisition of California -based Fresh Express in 2005, the group became the no.1 seller of packaged salads in the US, with 40% market share by certain measures. Chiquita is also a major producer of fruit snacks, drinks and smoothies in the US.

Opportunities in Europe alsoThere's also the opportunity for Greencore to stretch the Chiquita brand into new categories in Europe, given the former's distribution strengths in those markets especially the UK.

For example, on its own Chiquita is finding it hard to break even on its 'fruit in a bottle' drink, launched in seven European countries. Greencore's presence on the chilled shelf in those geographies should bolster the commercialisation of that product.

Financing the deal is problematic ...The question mark is of course balance sheet strength. On the assumption of FY2009 EBITDA of € 110 ('modestly higher' than FY2008, to quote management), Greencore's net debt /EBITDA ratio comes in at around x3,0. That's not ideal given the pressures and risks in convenience food.

.... but the acquisition could be quickly accretiveOn the other hand, the acquisition of Chiquita's salads and healthy snacks business would double the group's total convenience food business, to nearly € 2 bln in annual turnover. Operating margins could increase rapidly if synergies are executed.

Also, the valuation of that business, given margins and write-down history, shouldn't be too high (see valuation). That should prevent Greencore's debt ratios from increasing significantly. (Chiquita's management forecasts a 6% operating margin for that division in FY2009).

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THIS LEAD'S VALUATION
Size (€ mln) 500
Sector convenience food
Asset Quality USA leader branded
Seller large plc
Buyer mid-cap plc
P/S 0,6
P/Ebitda 6,0
Type transaction value estimate
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