Assessed blog 4- International mergers and acquisitions (M&As)

During the past decades an unprecedented increasing of international mergers and acquisitions (M&As) has been witnessed, possibly due to increased economic integration and international trade, and the strong global financial market to finance M&As (Kiymaz, 2004). By definition, according to Brealey, Myers and Marcus (2004), a merger is defined as "combination of two firms into one, with the acquirer assuming assets and liabilities of the target firm". And acquisition is the "takeover of a firm by purchase of that firm's common stock or asset. The unprecedented wave will be shown by the following table.

Figure 1: Mergers and Acquisitions Involving UK Companies, Q4 2013

Source: http://www.ons.gov.uk/ons/rel/international-transactions/mergers-and-acquisitions-involving-uk-companies/q4-2013/stb-m-a-q4-2013.html?format=contrast

Case study of the merger of Chiquita and Fyffes

•  Background

The most significant reason for the wave is an international firm can compensate for lost profit margins in its domestic market through international M&As. The shareholder wealth of bidders can be increased if the cross-border M&As can increase the bidders' market share and economies of scale or scope, and/or can reduce their operating risk and expense.

Therefore, nowadays, Irish fruit firm Fyffes and US rival Chiquita are to merge to create the world has a new banana behemoth, worth about $1bn (£597m).  The combined company will control about 14 per cent of the global banana market, according to Patrick Higgins, analyst at Goodbody Stockbrokers in Dublin, “The industry has been suffering from overcapacity for the past few years, so a combination of the two major players should resolve some of the volatility in the market,” he said. The new firm, named ChiquitaFyffes, is expected to sell about 160 million boxes of bananas annually, more than any rival.

The global market is currently controlled by four firms - Chiquita, Dole Food Company, Fresh Del Monte and Fyffes. Chiquita is the large company in the US, with annual revenues in excess of $3bn compared with €1.1bn at Fyffes in the Europe. Along with other main companies like Del Monte and Dole, Chiquita accounts for half the world’s banana exports.

• ·         Benefits to both parties

The deal would help bring down Chiquita’s net debt, currently 4.7 times earnings before interest, tax, depreciation and amortisation. The merged entity will have net debt to ebitda of 2.7 times.

Chiquita shareholders will own about 50.7 per cent of the merged entity, on a fully diluted basis, while Fyffes shareholders will own about 49.3 per cent.

The deal gives Fyffes an equity value of €379m or €1.22 a share – a 38 per cent premium to the closing share price on Friday (7^th Mar. 2014).

Combined, ChiquitaFyffes would have sales of more than 160m boxes of bananas annually, giving it scale to negotiate better deals with retailers, according to Mr Higgins. The companies hope to achieve $40m a year in pre-tax cost savings while gaining share in the melon, pineapple and packaged salads markets.

After it agreed to combine with Chiquita Brands to create the world’s biggest banana company, Fyffes`s share price rocketed 31 per cent to 98p in a stock-for-stock transaction that values Fyffes at $526m.

• ·         Reason for merge

A banana price war between large supermarkets, which often sell the fruit as a loss leader, has hit profit margins for distributors at a time when adverse weather and diseases are raising wholesale prices, squeezing producers’ profits to a certain degree. Some large retailers were also increasingly sourcing their bananas directly from producers, further damaging the revenues of distributors such as Chiquita and Fyffes. Their operating margins have been shrinking: Chiquita’s from 3.5 per cent in 2004 to minus 0.1 per cent for 2012, and Fyffes’ from 4.4 per cent to 3.5 per cent over the same period, say their annual reports.

After merge, ChiquitaFyffes will have more negotiating power with suppliers, although the Fairtrade Foundation warns that the merger would only squeeze banana producers further. Because the new company will have combined sales of $4.6bn. It will distribute about 160m cases a year in total, compared with 117m at Del Monte and 110m at Dole, giving it scale to negotiate better deals with retailers.

“The current low prices are not sustainable for the industry,” said Mr Smith, international co-ordinator for Banana Link, a UK-based campaigner for sustainable trade, “They are damaging the industry and the people who work for them.”

"This is a milestone transaction for Chiquita and Fyffes that brings together the best of both companies," said Chiquita boss Ed Lonergan. Personally, at present situation, this merger is a successful merger and both shareholders and stakeholders hold positive attitudes towards it. Hence, the merger is a good beginning for both parties.

Source:
http://www.ft.com/cms/s/0/43b73338-a825-11e3-a946-00144feab7de.html?siteedition=uk#axzz2wFmXsRL4

Kiymaz, H., 2004, Cross-border acquisition of US financial institutions: Impact of macroeconomic factors. Journal of Banking and Finance 28, 1413-1439.

Brealey, R. A., Myers, SC y Marcus, AJ (2004). Fundamentals of corporate finance.