Description

Chiquita Brands International (CQB) is a $2.3bn+ producer, marketer, and distributor of bananas and other fresh products, as well as the leading domestic producer of private label canned vegetables. It is the leader in the all-important EU banana market with 20% market share, versus the next competitor Dole at 17%, Fyffes at 14%, and Del Monte at 12%. In the US, it ranks second with 28% market share to Dole, who enjoys 32% share, but followed by Del Monte with 24% share. Its brand name is synonymous with high quality fruit that commands a premium over its rivals.

Through a series of management missteps as well as circumstances out of their control, the company found itself in early 2000 saddled with too much debt. Chiquita had levered themselves by adding shipping and farming capacity to take advantage of what was supposed to be a favorable EU trade regime instituted in 1993. Instead the company was beset by a system that would limit their ability to market fruit in the EU and see their market share decline from 40% to 20%. When combined with volatile banana prices that was a result of producers not being able to plan their business due to the capricious EU, a spike in fuel costs, a terrible market for canned vegetables, and a declining Euro and suddenly Chiquita, whose shares had once traded hands at $50 and whose enterprise value had been well over $2bn, found itself needing to restructure its liabilities.

During this past summer, the company and its creditors agreed upon a plan to forgive over $600mm of indebtedness in return for 95% of the company. The old equity is left with 2.5% plus warrants that would give them 25% of the company once the reorganized shares traded above $19.30. Furthermore, the creditors were able to nominate five directors to the new board, with the remaining two going to Carl Lindner and acting CEO, Steve Warshaw. No longer will this company be 40% owned and controlled by Linder and his AFG directors. The new board will bring fresh perspective on the business and bring a renewed focus on shareholder value. Presumably, the new board will not be constrained by past precedent and be willing to consider the full gamut of value creation initiatives including the sale or merger of a part or the whole business.

Chiquita Senior Notes represent a means to create shares of new reorganized Chiquita at an attractive valuation when the company emerges in mid-March. As it stands, the joint Plan of Reorganization was given initial approval by the Bankruptcy Court on 18 January. What remains is for the various classes of claimants to vote in favor of the Plan; given the lack of objections to date and the support of its major creditors, it is unlikely that the Plan will fail to be confirmed by the first week of March.

The Plan of Reorganization provides for the following economics:

Each $1,000,000 face value of 9.625% Senior Notes will receive approximately $327,700 in new senior notes and 46,010 shares of new common stock. With these 9.625% bonds trading at 92, you are effectively creating shares of new Chiquita at $12.87; assuming that the new bonds trade at par.

With 40mm new common shares outstanding, that would result in a market cap of $515mm. Add to that $305mm of net secured subsidiary debt used for working capital and $250mm of new senior notes, $12.87 per share values the enterprise at $1,070mm.

The company is projected to do $160mm in EBITDA for full year ended December 2001 and release earnings to that effect in early February. Add to that a turnaround in their canning business—the industry last year witnessed an unprecedented inventory liquidation—and the benefits of the EU-US trade dispute resolution that should conservatively add $35mm in EBITDA to the bottom line and the management’s projected $220-$230mm in EBITDA for 2002 is more than achievable.

Going forward, the company will pay out $66mm in interest, $55mm in capital expenditures and $15mm in cash taxes annually. Note that the company enjoys a low effective tax rate due to over $200mm+ of NOLs that it was able to preserve through the restructuring. This would result in $2.10 per share in cash earnings, assuming the low end of management’s 2002 EBITDA projection of $220mm.

Thus Chiquita is trading at 4.8x next year’s EBITDA and 6.1x cash earnings. Cheap for a company with such brand recognition, market leadership, and size.


Chiquita Brands International
estimated year ended 12/02

Revenue $2,350mm

EBITDA 220
Capex 55
Interest 66
Taxes 15
Cash Earnings 84

per share $2.10

Net Subsidiary Debt $305mm
New Senior Notes 250
Total Debt 555

New Common Shares O/S 40.0mm
New Warrants O/S 13.3mm


Price of 9.625% Old Senior Note 92
Cost per $1,000,000 face value $920,000
Recovery in New Senior Notes $327,700
New Common 46,010 shares

Implied Price per Share $12.87

Catalyst

-COMPANY COMPLETES AND EXITS REORGANIZATION IN MARCH, EQUITY IS LISTED AND THE STREET PICKS UP COVERAGE.
-COMPANY PROVES OUT THE BENEFITS OF THE EU-US TRADE DISPUTE RESOLUTION IN 2002 AND POSTS BETTER EARNINGS, REGAINING ITS CREDIBILITY AND INVESTOR CONFIDENCE.
-NEW BOARD OF DIRECTORS PROACTIVELY PURSUES SHAREHOLDER VALUE INITIATIVES.