Although it may face a multimillion-dollar termination fee, Chiquita Brands International, the world’s leading distributor of bananas finally announced on October 24, 2014 that its shareholders rejected its merger with Fyffes, an Irish produce distributor. Instead, its Board of Directors expressed its preference for the bid of a Brazilian consortium made up of the Cutrale Group, a Brazilian wholesale orange juice producer, and the Safra Group, a holding company in Brazil.
On March 10, 2014, Chiquita and Fyffes plc announced that both companies were contemplating an agreement under which Chiquita would merge with Fyffes, in a stock-for-stock transaction that was expected to result in Chiquita shareholders owning approximately 50.7% of ChiquitaFyffes and Fyffes shareholders owning approximately 49.3% of the proposed ChiquitaFyffes. The agreement would have created the largest banana producer in the world and would have been domiciled in Ireland.
This agreement was supposed to be the latest example of the so-called corporate tax inversion phenomenon. Pursuant to Section 7874 of the US Tax Code, American companies can buy smaller overseas rivals in order to reincorporate abroad and benefit from lower tax rates. Section 7874 only requires that after the deal, 20% of the company’s stocks must be owned by foreign shareholders. Regardless of the fact that the management, the employees, as well as the assets, stay in the US, from a tax perspective, the company has become a foreign one and as such does not get taxed on its profits made outside of the US.
This outcome highlights what inversion deals are really about: a way to get lower tax bills but above all, a way for a company to get its cash abroad. For example, despite its $145 billion abroad, mostly in lower-tax jurisdictions, Apple borrowed $17 billion in a bond deal to pay its shareholders. Indeed, it was cheaper to issue debt rather than returning this cash to the US. Chiquita has $1.7 billion overseas.
As for the Chiquita deal, the new regulations concerning tax inversions issued by the Obama administration in September, making them more difficult to complete, could also have influenced the potential deal. These new rules already forced Medtronic to restructure the financing of its $43 billion acquisition of Covidien, which would allow the American company to reincorporate in Ireland, where the corporate tax rate is 12.5% (compared to 35% in the US). The Board maybe also realized that the cash offer of the Brazilian consortium makes more sense economically than a tax arbitrage play for the shareholders. Instead of being the acquirer in a potentially risky deal, Chiquita’s shareholders may just have preferred the premium offered by the Brazilian bid.