These Investors Are Bananas for Wanting to Buy Chiquita

Buying Irish tropical-fruit company Fyffes, leading banana producer Chiquita Brands will control around 20% of the global banana export market, making it something of a no-brainer why it wants to do the transaction. The original agreement, which would split ownership of the new company nearly equally between both groups of investors, was quickly signed-off on by the boards of both fruit companies.

What's not so clear is why Brazilian orange juice maker Cutrale Group wants to risk slipping on a banana peel by trying to acquire Chiquita first.

"You can put them in a salad, you can put them in a pie." Chiquita remains top banana in bananas. Photo: Flickr user Mike Mozart.

Makings of a fruit salad
It's understandable that with their respective industries flagging, both companies want to improve their relative market position. Chiquita is the No. 2 market leader in bananas in North America, while holding the top spot in U.S. supermarkets. Cutrale controls about one-third of the $5 billion global orange juice market.

Yet bananas are suffering from weak pricing here at home and declining volumes in Europe, while orange juice sales are showing similar problems: U.S. retail sales fell to a 12-year low in July, down 8.3% from the year-ago figure, while the U.S. Agriculture Department said world consumption is expected to drop by 3.4% in 2014.

On the surface, the two fruit companies could be strengthened by a merger. In addition to orange juice, Cutrale also has global operations in apples, peaches, and lemons, and adding Chiquita's respected name in bananas (as well as its own diversified operations in salads and pineapples) would help it compete against Fresh Del Monte Produce, the second-largest banana producer, and Dole Foods, which claims it is "the world's largest producer and marketer of high-quality fresh fruit and fresh vegetables."

Yet any number of real-world examples can show that joining two sickly companies doesn't produce one healthy entity, but rather leads to a rapid decline for both parties involved. The poster child for such failed marriages has to be Sears, Roebuck and Kmart.

Sweet and sour sauce
Cutrale has the backing of Safra Group, one of Brazil's leading banks; its acquisition plan was generally seen as the superior deal for Chiquita shareholders, and Chiquita's stock surged after the offer was made.

Yet rather than accept the offer, the banana producer used it to wrangle additional concessions out of Fyffes' board, namely boosting to nearly 60% the ownership stake Chiquita investors would hold in the new company, which seemingly tilts the tables back in favor of the fruit company merger.

Some on Wall Street think Cutrale can still realize significant value from acquiring Chiquita if it raises its bid from $13 per share to as high as $16 or $17, but Chiquita investors might want to think long and hard before agreeing to merge with Cutrale.

Birth of a banana republic
Bananas, while one of the world's most popular fruit, face an apocalyptic crisis in the form of a virus that threatens to wipe out the Cavendish cultivar, virtually the only variety eaten in the developed world and the one used in global export markets.

The Cavendish was developed because it had been resistant to a virus strain that had all but wiped out the Gros Michel species, the previous worldwide favorite. The new fungus, however -- with the Terminator-like acronym TR4, for Panama Tropical Race 4 virus -- now threatens the variety with a similar fate in the not so distant future. Call it "banana-geddon."

Panama disease, a form of fusarium wilt, pictured above, might lead to the complete destruction of the banana export market. Photo: Wikimedia Commons.

Modern agricultural practices such as monocropping have helped the virus spread with alarming rapidity, and both scientists and agriculturalists are worried because there is nothing in the export market to replace the Cavendish, with its thick skin, prolific nature, uniform size, and long time to maturity.

Orange you glad I didn't say banana?
Yet oranges are facing a crisis all their own. Earlier this year, The Washington Post reported that about half of all the citrus trees in Florida were struck with so-called "greening" disease, an incurable bacterial infection that prevents fruit from ripening and ultimately kills the trees.

Feeling green around the gills, citrus green disease could decimate the Florida orange industry. Photo: Wikimedia Commons.

Florida supplies as much as 80% of all the orange juice in the U.S., but variants of the infection have been found in other states; it has spread to other countries as well, including Brazil, which supplies the remaining 20% of U.S. orange juice.

Equally problematic is the oversupply of capacity in the oranges market. Cutrale, which processes oranges for Coca-Cola's Minute Maid brand, estimates Florida citrus processing capacity sits at about 220 million boxes annually, roughly double the amount needed to process the current season's crop. Add in that orange production has been cut by more than half over the past 10 years (it's even worse for grapefruit), and that further declines are anticipated in the decade to come, and it's clear the Brazilian fruit company sees trouble on the horizon, and wants to diversify to protect itself.

Only those investors looking for relative short-term gain and not the long-term health of either company would ignore these dilemmas in bananas and oranges.

A slippery slope
Bananas generated $537.3 million in the second quarter for Chiquita, 65% of its total revenue, but nearly all of its operating profit. Salads, on the other hand, generated $249.3 million, or 30% of total revenue.

That means Cutrale is right that Chiquita can do more to invest in the salad market to wean itself off bananas, but it doesn't mean the OJ maker is the one to do it.

With the ravages of disease eating up the future for both companies, you'd have to be bananas to want to put these fruits together.

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