Chiquita Brands International’s decision to merge with an Irish fruit company and base its headquarters in Dublin wasn’t fueled by tax savings, CEO Ed Lonergan said Thursday, defending the company against a wave of political opposition to so-called “inversions.”
During a conference call with investors Thursday, Lonergan said the $40 million in annual savings the merged company, ChiquitaFyffes, expects doesn’t rely on tax savings from moving to lower-tax Ireland.
“Tax didn’t motivate our transaction, and it wasn’t a driver of our transaction,” said Lonergan. “Not a single dollar of those synergies comes from tax.”
But Lonergan said the growing opposition to inversions – which involve American companies merging with offshore firms and reincorporating in the lower-tax country – caught him off-guard.
“When we announced this transaction in March, we certainly didn’t anticipate the firestorm that’s occurred,” Lonergan said. Several other prominent U.S. firms, including pharmaceutical giant Medtronic, have announced plans to merge and move headquarters to Ireland.
The Senate held hearings in July about the issue, which Sen. Ron Wyden, an Oregon Democrat, called “the inversion virus” and an “underlying sickness” gnawing at the economy. President Barack Obama has publicly criticized such companies as unpatriotic, and the Treasury Department is exploring tax law changes that could limit the practice.
Though drugstore chain Walgreen Co. decided Wednesday not to reorganize overseas and will instead remain based in the U.S., Lonergan said Chiquita plans to press ahead with its deal with Dublin-based Fyffes, which he called “transformational.”
Lonergan said Chiquita is still on track to close its deal with Fyffes by the end of the year. The combined company will be headquartered in Dublin and led by Fyffes CEO David McCann. Most of the company’s 320 corporate jobs in Charlotte are expected to remain, executives have said.
Chiquita and Fyffes have said they expect to save money with their merger through combining shipping operations, sourcing fruit more cheaply and cutting corporate overhead. Tax savings don’t play a huge role in the deal, executives have said, because Chiquita’s U.S. tax bill is relatively small. Much of its business is overseas already – 39 percent of its bananas are sold in Europe and the Middle East.
In the second quarter, Chiquita paid $4 million in U.S. taxes on its profits, at an effective tax rate of 17 percent.
Still, in previous interviews, Fyffes CEO McCann has acknowledged having the headquarters in Dublin could lead to tax advantages.
“Can you make the argument that this will one day be attractive from a tax perspective? Perhaps,” McCann said in a March interview with The New York Times. “We are certainly taking advantage of having a true multinational corporation.”
Chiquita and Fyffes have set Sept. 17 meetings for shareholders of both companies to vote on the $1 billion deal. Lonergan said none of the changes to tax law that legislators are discussing to block inversions would dissuade Chiquita from combining with Fyffes.
Profits slip 42%
The deal with Fyffes comes as Chiquita is struggling to improve its results. Profits at Charlotte-based Chiquita slipped in the second quarter. The company earned profits of $18 million in the second quarter, down 42 percent from the same quarter last year.
Chiquita assigned much of the blame to dry weather, which hurt banana production on the company’s farms in Panama, Costa Rica, northern Guatemala and Honduras. Chiquita had to buy more bananas than usual on the expensive banana spot market to make up the shortfall.
“We’re managing a business that is dependent on whatever deity you want to think of that determines whether we get water,” Lonergan said.
The company’s revenue climbed just under 2 percent in the second quarter, to $826 million. But its cost of sales grew at a faster rate, 3 percent, eating into profit margins.
Bananas remain the biggest seller for Chiquita, accounting for $537 million in sales during the quarter. That’s up 3 percent. But operating income from bananas fell 19 percent, which Chiquita said was due to higher sourcing and logistics costs.
Sales of salads and salad ingredients, Chiquita’s other main business line, fell 4 percent, to $249 million. The company said it sold fewer bagged salads, food service ingredients and processed fruit ingredients. Still, operating income from salads more than doubled, to $7 million, because Chiquita cut costs.
Chiquita reported disappointing results last quarter, when the company lost $25 million. Executives blamed higher shipping costs and shifting rainfall patterns that hurt crop production.