Aviclara181 did a terrific write-up of Chiquita back in April. Since then the situation has significantly changed, so we thought it was worth writing up again, particularly with a couple very near-term catalysts. We did this write-up before the new merger terms came out last Friday, but we think revised terms make the setup more interesting. The opportunity is sitting in a gap between the merger-arb and fundamental realms, with a favorable “heads I win a little, tails I win more” risk-reward. Specifically, CQB presents a rare situation where we see fair value for the business nearly double an announced unsolicited offer, presenting the opportunity to own CQB at a 5% spread (14% annualized return) to a potential takeout or, alternatively, at an 80%+ margin of safety to its previously announced merger. Please see Aviclara181’s write-up for a more detailed background on CQB. This write-up will focus on recent events and how we think about valuation under the potential scenarios.

Transformational Merger With Fyffes: On March 10^th, CQB announced a merger with Fyffes (an Irish banana company) that would provide numerous strategic benefits (increased scale, diversified sourcing), generate significant synergies (30%+ of combined EBITDA), delever the pro forma entity, and result in increased liquidity in the stock (market cap would increase from ~$500 million to >$1 billion). Despite initially trading up from $10 to $12.50 following the merger announcement, the stock retraced to $10 after a weak Q1 earnings report that was largely due to temporary issues (e.g., weather).

Enter Cutrale-Safra Unsolicited Bid: On August 11^th, Cutrale Group (a Brazilian agribusiness that primarily grows oranges) and Safra Group (a Brazilian asset management firm) made an unsolicited bid for CQB at $13 per share, contingent on CQB terminating its deal with Fyffes. We think Cutrale-Safra took advantage of a temporarily weak stock price and depressed LTM EBITDA to submit a low-ball offer that only optically appears reasonable. On August 14^th, the CQB Board found the offer inadequate and refused to furnish any information or negotiate with Cutrale-Safra. The next day Cutrale-Safra commenced a proxy campaign to force an adjournment of the Chiquita special meeting to vote on the Fyffes merger. After a lot of back and forth (and ISS recommending the adjournment), CQB postponed the special meeting from September 17^th to October 3^rd to allow time for Cutrale-Safra to conduct focused due diligence and present a best and final offer, with the potential for an additional 14 to 21 day adjournment.

Revised Merger Agreement: On September 26^th, CQB announced revised merger terms with Fyffes where CQB’s ownership of the combined company would increase from 50.7% to 59.6%, while the break-up fee increased from 1% to 3.5% of CQB’s issued share capital. Additionally, the special meeting was postponed to October 24^th. We expect to know within the next several weeks, if not sooner, where Cutrale-Safra’s final offer is and which path CQB will take.

We think the original $13 offer significantly understates fair value for CQB, given the value that could be created through the Fyffes merger especially under the revised merger terms. The market clearly agrees given that CQB quickly traded through the initial offer and has hovered around $14 over the last month. However, we still think CQB presents a favorable risk-reward even at the current price.

Scenario 1 – Cutrale-Safra Wins: We think it will take an offer at $15 or above for the Cutrale deal to get done. We admittedly don’t have any particularly hard data-points for why $15, but it’s our best guess based on market commentary, standalone fair value under the Fyffes deal, and the fact that CQB was trading at $12.50 back this spring.  Based on a $15 take-out price, the stock is currently trading at a 5% discount or a 14% annualized spread. Note, we think of $15 as the floor for a deal to get done and could likely see a higher purchase price than this. As a standalone merger arb situation, we think this return profile is interesting but not unusually compelling given the acquirer is a private Brazilian company which we have had an incredibly difficult time diligencing. However, what makes this situation attractive to us is that we see fair value for Scenario 2 significantly higher than the Cutrale take-out price.

Scenario 2 – CQB / Fyffes merger goes forward: We see fair value for the pro forma ChiquitaFyffes at $26, assuming 12x PF “Cash” EPS of $2.20. For those comparing to Aviclara181’s estimate of pro forma financials, we are generally in the same ballpark, though see less benefit from FX given the move in the Euro offset by the more favorable merger terms. We see PF EBITDA of $290 million, assuming $168 million for normalized Chiquita, $62 million for Fyffes, and $60 million of synergies. We get levered maintenance FCF of $180 million or $2.20 per share, based on $50 million of combined maintenance capex ($40 million for CQB and $10 million FFY), 15% tax rate (will be redomiciled in Ireleand but no disclosure at this point on PF blended tax rate), and $35 million of run-rate interest expense (assumes 7.875% bonds refinanced in early 2016; leverage ratio will decline from 5.6x to 2.3x). Although we suspect that CQB would trade down on news of the Cutrale option falling apart, you are still owning CQB at an 80%+ margin of safety (or 6.5x PF “cash” EPS) in the event the Fyffes merger moves forward.

Inversion Risk: Yes, this is technically an inversion. I’m sure some of you are far more familiar with potential impact of recent regulatory changes around inversions than we are. We would highlight that the Fyffes merger is significantly different than most other inversions currently in process (e.g., pharma). CQB has limited offshore cash, the pro forma entity will be 40% owned by Fyffes shareholders, the management team will be based in Ireland, and depending on internal costing US EBITDA could potentially make up less than half of the combined entity. Not to mention that there is a significant U.S. tax shield already from a considerable amount of NOLs and interest expense, so there are not a lot of US taxes that they are trying to offset. Management wisely has remained quiet on the tax implications of the deal, but we do see risk (to the upside and downside) on our assumed 15% blended tax rate.

Risks: CQB / Fyffes has been reported to receive EU antitrust approval but with remedies (unclear how significant these will be). The banana business can be significantly volatile given exposure to weather and tough competitive dynamics. Salad restructuring could take longer than expected. Finally, we really do not have a sense of how big the gap down could be in the event Cutrale walks, except that we believe this would be short-term mark. 

- Announcement of final Cutrale-Safra offer

- CQB special meeting to vote on Fyffes in late October