Glenboden M & A Originations

New JV with Chiquita signals Danone's move back into fruit

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Origination Status joint announcement of strategic JV, March 2010
Asset Chiquita's 'Just Fruit in a Bottle' chilled juice business in Europe; 'Chquita' trademark licence in fruit beverages in Europe
Buyer Groupe Danone (France), multinational food and beverages group (majority partner)
Seller Chiquita Brands International (USA), global no.1 banana distributor (minority partner)
Buyer Rationale diversify chilled healthy products business beyond dairy and into drinkable fruit (Danone)
Seller Rationale greater distribution and R&D strength of Danone throughout Europe (Chiquita)
NBs Danone is to acquire 51% of the JV's shares
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For some time Danone has stated publicly its aim of diversifying its chilled dairy business into drinkable fruit. This JV with Chiquita allows it to start that, on a relatively small scale, and to leverage one of the world's strongest fruit brands. A key issue is whether Danone's high profitability targets can be achieved in 100% fruit.

Chilled smoothies a small category so far ... In the four years since its launch, Chiquita's 'Just Fruit in a Bottle'(R) product has become a market leading brand of fruit smoothie in Europe, with distribution in 12 countries so far.

Generating about € 20 million of sales in 2009, 'Just Fruit in a Bottle' constitutes only about 1% of Chiquita's global turnover (see chart). At the same time, chilled single -serve smoothies and juices are a fast -growing and forward -looking category in Europe.

... of strategic interest to Danone ...Danone's interest in this category stems for its wish to diversify its chilled business beyond dairy and, more specifically, to develop new functional products based on fruit as well as dairy.

This is a challenge technologically as fruit, for reasons like acidity and fat content, isn't able to support functional bacteria as easily as milk does.

At the same time, if anyone's able to achieve this it's Danone; no doubt that consideration was part of Chiquita's rationale for the JV.

JV partners have different profitability targets ...Chiquita, as a group, has gone through a financial turnaround in recent years and, even in the recovery year of 2009, its EBITDA margin was still significantly below 10%.

Longer -term also, one would expect a group with Chiquita's profile to have relatively low margins, by the standards of large food corporations.

... Chiquita has lower -margin fruit profile ...Most of its sales are of commodity or low added -value fresh fruit and vegetable products; principally bananas, but also ready-to-eat salads and fruit salads, smoothies and whole fruit and vegetables.

... Danone has high -margin value -added portfolioDanone, on the other hand, is a very different and much more profitable animal. Its portfolio covers chilled dairy, including its breakthrough 'Actimel' and 'Activia' functional products (respectively for immunity and transit).

Danone's other two divisions are low -cost bottled water and, after its acquisition of Numico in 2007, age -related nutrition (for the young, the old and the infirm).

With a portfolio of such sophisticated and value -added products, Danone is able to consistently generate an EBITDA margin of around 20%. That's more than double Chiquita's level.

Inevitably, any new investments by Danone would need to have a pathway to achieving such a hig margin 'hurdle'. Since Danone has 51% of the JV with Chiquita, it will be driving the process of getting to that level.

Danone may need to take the JV away from pure fruit ...That could make the marketing platform of 100% fruit, inherent in the 'Chiquita' brand in general and in 'Just Fruit in a Bottle' in particular, problematic.

Especially when, according to the announcement of the JV, it appears that 'Just Fruit in a Bottle' is not yet profitable at all.

It's likely that Danone will need to drive this business deep into functionality territory, and away from 100% fruit, if it's to achieve a 20% EBITDA margin in the mid -term.

... Coca Cola and Pepsico facing the same issue ...But Danone is not alone in facing this challenge. In 2009 Coca-Cola acquired a 25% stake in Innocent, the iconic youth brand in smoothies and market leader in the UK. Also Pepsico acquired PJ Smoothies in the UK in 2005 (subsequently retired), and Naked Juice in the US in 2006.

These acquisitions are all in the same space as 'Just Fruit in a Bottle', although they don't have the global brand that 'Chiquita' is able to provide. On the other hand, Coke and Pepsico also have the option of focusing efforts in this category on their own brands, especially Pepsico with 'Tropicana'.

Another serious player in chilled juice and smoothies, potentially, is Unilever. Under its 'Knorr' brand, it launched a fruit and vegetable shot, called 'Vie' in 2006, that leveraged the 'five portions of fruit and veg per day' message. However it's not clear how serious Unilever is in this space longer -term.

... smaller competitors may have an advantageAll of these multinational groups have high profitability hurdle rates for new products. So it could be that smaller groups, privately -held or majority controlled by non -stock market investors, that have more modest profitability targets, will prevail in the drinkable fruit category. Companies like Eckes-Granini for example.

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THIS LEAD'S VALUATION
Size (€ mln) 20
Sector fruit smoothies
Asset Quality Europe niche branded
Seller large plc
Buyer large plc
P/S 1,0
P/Ebitda n/a
Type value estimate
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