Join our community of smart investors

Fyffes is ripe for M&A

Banana, melon and pineapple producer Fyffes (FFY) is a prime acquisition target for 2014.
January 8, 2015

Fyffes (FFY) has been on quite the roller-coaster ride these past few months as a result of the collapse of the dual-listed banana trader's attempted merger with produce giant Chiquita (US:CQB) in October. While the derailing of the deal caused the shares to slump, looking ahead to 2015 it only serves to highlight the value on offer and enforces our view that Fyffes is a prime takeover target. The fresh produce industry remains mature, highly fragmented and growth is hard to come by, which puts consolidation firmly on the cards. And Fyffes looks an extremely attractive target given its lowly valuation, solid operations and a robust balance sheet that is being substantially strengthened by an €18.5m windfall from Chiquita as part of a merger termination agreement.

IC TIP: Buy at 79p
Tip style
Speculative
Risk rating
High
Timescale
Long Term
Bull points
  • Sector ripe for consolidation
  • Strong earnings growth
  • Net cash position
  • Low-cost operations
  • Low rating
Bear points
  • Commodity price fluctuation
  • Weather risk

Fyffes' all-share merger with Chiquita fell through after Brazilian juice-maker Cutrale and investment firm Safra weighed in with an offer that Chiquita shareholders couldn't refuse. It was a shame. The merger was popular on both sides and would have created the world's largest banana company, worth more than $1bn. Still, from the perspective of a potential offer for Fyffes, the fact that Cutrale and Safra were willing to pay a huge premium for Chiquita can only be encouraging. Indeed, the enterprise value (EV) put on Chiquita at the $680m take-out price was equivalent to 12.5 times cash profits, which compares with Fyffes' EV-to-cash-profits multiple of 6.3 times, based on forecasts for the recently completed financial year.

With top-line industry growth averaging just 1-2 per cent, the sector's big beasts, such as Total Produce (TOT), already follow a strategy of acquisition-led growth. We believe that the Fyffes/Chiquita/Cutrale saga signals a start to a period of much larger merger and acquisitions (M&A) as companies in this sector look at where to best deploy capital and become more aggressive in accelerating consolidation.

Fyffes is a great contender as a bid target. First, it's Dublin-domiciled, meaning an acquirer or merger partner could benefit hugely on its tax bill by relocating headquarters to Ireland, where the corporation tax rate is 12.5 per cent. The purveyor of bananas, melons and pineapples has also enjoyed earnings forecast upgrades this year, following a bountiful first half when profits rose nearly 40 per cent. The positive performance was partly driven by flattering exchange rates, but also by huge improvements in profitability in the melons business, where heavy investment has made farming operations and logistics more efficient. More generally, Fyffes has improved production capabilities and taken costs out across the group, making it a much leaner operation than it was a few years ago. Cash generation is strong and, following the termination fee payment, Fyffes is expected to have finished 2014 with net cash of €14.6m.

 

Fyffes makes sense as an investment without the takeover angle, though. If a bid is not forthcoming, it is in a strong position to go on the acquisition trail itself or return more funds to shareholders, similar to the 3m share buy-back carried out in December this year. Indeed, management has a strong record of creating value for shareholders in this slow-growth industry. True, there are inherent risks with Fyffes, as short-term performance is heavily influenced by outside factors such as banana prices, exchange rates, cost of fruit, shipping and fuel, all of which can be hugely volatile. But at the moment shipping and fuel costs have fallen dramatically thanks to the plunging price of Brent Crude, offsetting weaker fruit prices in some areas. And encouragingly, banana prices - bananas make up nearly half of group profit - now look tastier, following an unusually strong third quarter.

 

HOW FYFFES MAKES ITS MONEY

Group cash profit breakdown:

Bananas: €25.4m

Pineapples: €7.8m

Melons: €10.4m,

Associates: €1.7m

 

FYFFES (FFY)
ORD PRICE:79pMARKET VALUE:£233m
TOUCH:77-81p12-MONTH HIGH/LOW:111p69p
FWD DIVIDEND YIELD:2.4%FWD PE RATIO:9
NET ASSET VALUE:53¢NET CASH:€5.7m

Year to 31 DecTurnover (€m)*Pre-tax profit (€m)Earnings per share (¢)Dividend per share (¢)
2011659.012.53.51.925
2012783.726.18.02.07
2013835.828.78.62.17
2014**852.530.28.72.3
2015**869.537.410.82.4
% change+2+24+24+4

Normal market size: 3,000

Matched bargain trading

Beta:0.2

*Turnover excludes joint venture with Balmoral International

**Davy Research forecasts

£1=€1.25