News that Irish fruit and veg importer and distributor Fyffes had been acquired by Japan’s Sumitomo Corporation in a €751m (£635m) deal came straight out of left-field this morning, and left many food and drink analysts scrabbling around in a bid to learn more about the Tokyo-based conglomerate.
It is well documented that Fyffes – best known for its bananas operation – has been up for sale for several years. However, a mega-merger with rival Chiquita fell through in the autumn of 2014, and it has since been on the acquisition trail itself; snapping up a pair of Canadian mushroom businesses earlier this year.
The deal with Sumitomo is described by Fyffes chairman David McCann as a “compelling proposition” for its shareholders, with the two companies agreeing on a cash offer worth €2.23 per Fyffes share. “This transaction crystallises the substantial value created in recent years through the various strategic developments and the strong operating performance of our group.” McCann adds.
So what does the deal mean for Fyffes, what do we know about Sumitomo, and what are the implications for the grocery sector?
First things first, what happened?
Fyffes and Sumitomo announced the deal on Friday morning (9 December), with Swordus Ireland Holding, a wholly-owned subsidiary of Sumitomo, acquiring the entire share capital of Fyffes at €2.23 per share.
The Japanese company’s offer represents a premium of 49% on the €1.50 closing price of Fyffes last night, and a 53% increase to the average share value in the past month. It is also 37% higher than Fyffes’ all-time high share price of €1.62 earlier this year when it acquired mushroom business Highline Produce.
The deal is subject to approval by the relevant anti-trust authorities, However, Fyffes said just over 27% of shareholders had already backed the sale, which is expected to be rubber-stamped in the first quarter of 2017.
Fyffes will continue to be domiciled in Dublin and run as a separate business unit to Sumitomo’s other operations, according to a spokeswoman for the business.
Who is Sumitomo?
The Sumitomo Corporation was incorporated in 1919, but it can trace its history all the way back to the 17th Century, when Masatomo Sumitomo opened a book and medicine shop in Kyoto. The modern business is a publicly traded company worth in the region of $15 billion (£11.9 billion), which consists of more than 800 companies and 65,000 staff worldwide.
Sumitomo’s business philosophy is that of “pursuing integrity and sound management rather than easy gain”, however, its banana operations have come under fire in the past, with allegations of worker abuse levelled at its Philippine subsidiary Sumifru earlier this year.
What’s the rationale for the deal?
Sumitomo has been operating a banana production, supply and distribution business since the 1960s. It owns plantations in the Philippines and enjoys a 30% share of the banana market in Japan.
“The Fyffes acquisition will, therefore, be complementary to Sumitomo’s existing banana business, providing substantial expansion into new geographies,” says Investec equity analyst Ian Hunter.
Sumitomo has “long admired Fyffes for its outstanding track record and market leading position”, according to managing executive officer Hirohiko Imura, who adds the acquisition will further the corporation’s position “as one of the most globally diverse companies”.
It will also help expand the regions and end markets for its produce division, and give the business a stronger global footprint and better economies of scale, according to a briefing note published by Sumitomo. Fyffes’ employees, meanwhile, would benefit from “new opportunities which will derive from being part of an enlarged group that has the financial power to grow”, it says.
“Sumitomo is such a big company, with a mix of businesses, and you’re not entirely sure what they have under the hood,” adds Patrick Higgins, an analyst for Dublin investment company Goodbody.
“But on the face of it, we can understand the rationale. There has been a trend of big Japanese companies looking to break into Europe, such as Asahi, and Sumitomo are very well capitalised. And from a Sumitomo perspective they are quite complementary as it is the largest distributor in the Japanese banana market while Fyffes is the largest in Europe.”
Ultimately, though, it’s about cold hard cash. Sumitomo has a mountain of it, with cash reserves of $8 billion, and after making a name for itself in Asia, it now has eyes on the lucrative European and American markets. “The business has been buying up other companies in Europe, including a few crop protection and fertiliser companies, but nothing of this scale,” adds Investec’s Hunter.
How big a player does this make Fyffes? And how does it compare to the collapsed Chiquita deal?
Fyffes says it is very much business as usual, and it will continue to trade out of its Dublin base as normal, but there’s no denying it will carry much more clout once the deal goes through.
When the aborted Chiquita deal was first announced, a combined Fyffes/Chiquita business was described as potentially the world’s largest fruit company.
“Sumitomo’s main business is not in bananas and it’s a massive conglomerate, so it can’t be compared,” adds Hunter, but combining the total value of its $1.4 billion (£1.1 billion) bananas operation with Fyffes’ annual turnover of €1.2 billion (£1 billion) significantly bolsters its position in the global produce sector.
How will it affect the bananas on supermarket shelves?
It’s too early to say, but from experience, very little should change, according to Hunter.
“Bananas are a loss leader, but generally speaking, the suppliers have had a very good relationship with retailers. In 2014, we saw prices increase because of supply issues,” he says.
“All parties know of the very low margins these banana businesses operate in, but they have to have bananas and they have to be delivered every week, so they have had a strong position where the retailers are concerned, and I can’t see that changing.”
What has the initial reaction been?
Sumitomo’s offer of €2.23 per share is higher than Chiquita’s final offer of $21 (€19.9/£17.6) per share in 2014, and has been welcomed by City and Dublin-based investment firms.
Merrion Investment Managers has recommended Fyffes as a “key pick”. It says future opportunities are likely to be “much greater given they now have a significantly greater platform and financial capacity under the Sumitomo umbrella”.
Hunter adds the acquisition is a “good deal” for Fyffes shareholders, and has revised his buy recommendation to ‘hold’, while Patrick Higgins of Goodbody agrees the deal is attractive, despite being “slightly surprised”, when it was announced.
“The company has had a very strong performance over the past few years but that hasn’t necessarily been reflected in its valuation,” Higgins says.
“So this deal allows them to realise a lot of the value from the stock, particularly with a circa 50% take-out premium. If you look at Fyffes post-Chiquita they looked to regather themselves and make sure the core business continued to grow. They made a couple of acquisition this year in the mushroom sector and had intentions for further acquisitions.”
Elsewhere, Rabobank analyst Cindy van Rijswick, thinks increased global consolidation could be the way to go in the future.
“There are limited synergies and similarities between the European and Japanese banana market, with bananas for Europe mainly sourced from Ecuador and Colombia whereas the Philippines are the main supplier for the Japanese market,” she says.
“For banana traders an efficient supply chain is key; logistic costs, banana prices and exchange rates are key performance drivers. But as the climate becomes more extreme and disease pressure grows it is increasingly important for banana suppliers to spread risks,” van Rijswick adds. “From that point of view internationalisation in both sourcing and markets makes sense.”
But not everyone is happy with the deal. “This is hugely frustrating and I can’t see how these changes will be positive for the workers on Fyffes’ plantations,” says NGO Banana Link’s UK national co-ordinator Jacqui Mackay.
“All this will do is add another layer to its already complicated supply chain, and take the owners one step further away from the workers. The bigger the company the more the concern about transparency and accountability; it’s going to become much harder for us to hold them to account on workers’ rights,” she warns.