One of the biggest-ever acquisitions of an Israeli company was completed early last October. International Flavors and Fragrances (IFF) (NYSE: IFF, TASE: IFF) bought Israeli company Frutarom in a cash and shares deal reflecting a value of $6.37 billion for Frutarom. As part of the acquisition, IFF's board of directors decided to have their company's share listed on the Tel Aviv Stock Exchange (TASE), together with its listing on the New York Stock Exchange (NYSE). Just over three months later, IFF is emerging as an island of stability for local investors.
In the short period in which it has been listed on the TASE, capital markets in Israel and worldwide have been in a state of upheaval. The shares of many companies dropped precipitously, with the Tel Aviv 35 Index losing over 6%, while IFF's share price was down only 2%. As of now, IFF's market cap is $14.3 billion, putting it in second place after Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) on the TASE in market cap.
IFF will celebrate the 130th anniversary of its founding this year. The company is headquartered in New York. Like Frutarom, IFF develops and produces flavor and fragrance essences and raw materials, which it supplies to the food, beverages, personal care, and household products industries. The company's flavor and fragrance essences are sold as both isolated components and compounds of a large number of elements for creating unique formulas.
IFF chairman and CEO Andreas Fibig and CFO Michael DeVeau visited Israel this week. Among other things, they visited the company's facilities in Israel and made a presentation to investment institutions. In an exclusive "Globes" interview, Fibig says that he believes that the combination of IFF and Frutarom is creating a real power in the global essences industry.
"IFF's business has grown substantially over the years. In the 1970s, it was known in the US as one of the shares that everyone had to keep in the investment portfolio, just like General Electric," Fibig says. "Things have changed since then, but now we really want to get back to the same place."
The acquisition of Frutarom gave IFF an extensive base in Israel, including Frutarom's plant and facilities in Haifa Bay and the plant and development center of Enzymotec in Migdal HaEmek. IFF now has a total of 400 employees in Israel out of 13,000 employees worldwide.
Fibig says that the acquired activity in Israel enables him to be exposed to many aspects of the economy and industry in Israel. "One aspect concerns the very good agritech and biotech sectors that exist here, which can help us in areas of innovation. The second aspect is the base of investors, because we see that there's a lot of money here and many sophisticated funds that we will be glad to see become long-term investors in our share. In recent weeks, we saw that IFF's share can provide an anchor of stability in periods of uncertainty."
"Globes": Frutarom grew over the years through many acquisitions of small companies all over the world. Is growth via acquisitions also IFF's strategy?
Fibig: "As part of the deal, we combined the list of the companies that were candidates for acquisition with the list of companies that IFF was considering. Now we're going to make deals that we think will be useful to the combined company. In the future, we'll see more acquisition deals go through. It probably won't be acquisitions of companies on the scale of Frutarom; they'll be smaller companies with an important contribution to us."
But Frutarom grew rapidly by acquiring dozens of small companies, while IFF is a much larger company. In order to grow, it will have to make larger acquisitions.
"Larger acquisitions, or alternatively acquisitions of smaller companies with technology that can be channeled for the entire customer base. We have over 30,000 customers, and if we buy a company with special technology, but which has exposure to only 1,000 customers, we'll be able to take its technology and make it available to a much larger number of customers."
You came to Israel this week in order to meet with investment institutions and tell them about the company. Why did you decide to list IFF's share for trading in Tel Aviv as part of the Frutarom acquisition?
"We decided to remain here for many reasons. First of all, because following the acquisition, we have a fairly significant activity base in Israel in terms of employees and assets on the ground (factories, laboratories, offices, etc., O.C.). Secondly, we now have good Israeli investors, and we really want to nurture our base of investors here.
"We also saw that it doesn't require too much effort on our part to be listed in Israel, too, in addition to trading in our share in New York. It's also not too expensive, and that's another reason why we said that we'd leave the share here.
"We also want to increase the share of the Israeli investors in the company, because there's a good base here of money and good financing, and we can work with it. 50 representatives of investment concerns attended the conference we held today - that's very good."
Do you see this dual listing continuing in the long term?
"Yes. There's no reason for us not to continue it in the coming years, or even forever, because it has worked well for us so far."
Here to stay
The option of dual listing in Israel has existed for almost two decades, but to date there are few examples of US companies with values in the billions that acquired Israeli companies and stayed listed here. The main ones are Perrigo Company (NYSE:PRGO; TASE:PRGO), which acquired Agis Industries over a decade ago, and Opko Health Inc. (NYSE: OPK; TASE: OPK; TASE: OPK), which acquired Prolor Biotech five years ago. There were also Israeli and foreign companies that had themselves dual listed for various reasons. Some of them are still here, but there were also quite a few that had themselves delisted from the TASE after a few years.
You don't see dual registration as being complicated and requiring you to work simultaneously with investors in New York and Israel?
"No. Both I and Mike (CFO Michael DeVeau) will come here regularly, so we'll be able to meet with them, and we'll also invite them to investors' meetings conducted in Europe and the US. I think that it can be done. Actually, there's a lot of interest in the share, and I hope that we'll be able to show our investors that it's a good share with great stability in the long term."
Why did you acquire Frutarom? What were the reasons that made you choose this company? It's a big deal, even for a company like yours.
"It's a very transformative deal, and I'd say that we had three or four reasons. The first reason is that if you look at the customer base, we saw that in recent years, the large companies like CPG (a manufacturer of packaged consumer products for daily use, O.C.) that were among our customers suffered from slower growth, while the small and medium-sized customers were growing faster.
"Frutarom had a very large exposure to this customer base (small and medium-sized companies with higher growth rates, O.C.), and now we have over 30,000 customers, giving us the largest customer base in the industry. No other company we could have acquired would have brought us to this number.
"The second reason is that Frutarorm dared to enter additional areas of interest to us, such as active cosmetics, food protection, natural colors, and healthy ingredients, which had stronger dynamic growth than what we had achieved. Through the acquisition, we obtained exposure to complementary and growing fields of business.
"The third reason is that 70-7% of Frutarom's products are natural products, and this is definitely a trend that will stay with us for a long time. A fourth reason can be added - the fact that where the logic of the sector is concerned, the acquisition made us another market leader.
"Now there are two leading companies in the industry (IFF and Swiss company Givaudan, O.C.), followed by two medium-sized companies (Symrise AG and Firmenich), and the rest are very small companies, so the acquisition made us a leading company in the industry, and also made the entire sector reach almost full consolidation."
During the negotiations on the deal, did you feel that you were competing with other companies over the acquisition of Frutarom?
"There's always also talk about other companies, but I believe that we started early enough, and that Ori Yehudai (Frutarom CEO until the merger was completed, O.C.) and I built a good personal relationship that made it possible to made the most useful deal for both companies."
But in order to acquire Frutarom, you had to persuade John Farber, who was the controlling shareholder in Frutarom and was also served as chairperson. How did you persuade him to sell you the company?
"First of all, what helped was that John lives in New York, and that's also where our headquarters is. By the way, one of IFF's former chairpersons lives close to him. But I'd say, that we gave him a good perspective, and we hope he remains an investor in the merged company, because it's a good investment.
"I think that we convinced him for the future of Frutarorm, it was better for it to combine with IFF, because this measure generates such great synergy on so many levels that a united company will be good for the organization and its shareholders. After a few months of discussions, he agreed with it, and we're very glad, and will even meet him for dinner next month. So I think that relations are good."
Does he still hold the IFF shares that he got in the deal?
"Yes. He got a little less than 5% of IFF's shares, and he still has them."
What did you feel when you met him and spoke to him? Do you think he decided to sell because he was a little tired of being the controlling shareholder in Frutarom after so many years, or simply because he decided that it was a good business opportunity?
"I think that it was a good opportunity for him, that it's very important. He's 93, so he has to make sure that his affairs are in order."
Is he restricted in selling the shares following the deal?
"No, there's no period in which the shares are blocked; he's entitled to sell whenever he wants."
"Yehuda's advice is useful for us"
As part of the deal, Yehudai got an enormous $20 million bonus, which the Frutarom board of directors approved, despite the opposition of most of the minority shareholders. What do you think about that?
"I can't comment on that, because it's completely in the hands of Frutarom's former board of directors. It decided on it, and acted accordingly even before the deal was completed. So I can't respond to this. They thought that it was the right thing to do, and decided on it."
Does Yehudai have any role in the company at all following the merger?
"He's remains as a consultant to the company, and we actually also met during the current visit in order to talk about company's business. His consultation agreement with us is up until the end of 2019, but we're flexible, and we'll both consider extending it at the end of the year."
When you look now at your industry, where do you see the growth opportunity?
"The growth opportunities for us are in many of the complementary fields, such as food protection and active cosmetics, because they have growth rates of 5-7%. In addition, 50% of our business is in emerging markets; despite their volatility, more and more people are still joining the middle class there.
"This creates more demand for our products, because these products are found in all packaged food products, in all detergents, and in all fragrance products. As more people move to the cities and join the middle class, they start consuming these products. This is an huge opportunity for us, because we sell to both giant companies and small companies with high growth rates."
Published by Globes, Israel business news - en.globes.co.il - on January 20, 2019
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