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International Flavors & Fragrances (NYSE:IFF) agreed to buy Israeli flavors and ingredients maker Frutarom (LSE: FRUT, TASE: FRUT) for $7.1 billion in cash and stock on Monday, vying for the industry’s top spot with market leader Givaudan.
The flavors and fragrances sector was expected to consolidate after Geneva-based Givaudan said in March it planned to launch an offer for French natural ingredients firm Naturex and Israeli media reported last month that Frutarom had attracted takeover interest.
IFF’s takeover of Frutarom, which has been approved by both boards, would be the second largest of an Israeli company, behind Intel’s $15 billion purchase of Mobileye.
“By combining our deep R&D expertise with Frutaroms, we are offering our customers a broader range of solutions and accelerating our growth strategy,” IFF CEO Andreas Fibig said.
Givaudan is expected to post revenue of 5.34 billion Swiss francs ($5.3 billion) this year, not yet taking Naturex into account, analyst estimates collected by Thomson Reuters show.
At present, IFF is broadly on par in revenues with Germany’s Symrise with 3.1 billion euros ($3.7 billion) in expected 2018 sales and unlisted Firmenich of Switzerland.
IFF said the acquisition unites two firms with complementary customers, capabilities and geographic reach that would result “in more exposure to fast-growing end markets.”
Under the terms of the IFF deal, Frutarom’s shareholders will receive $71.19 in cash and 0.249 per share of IFF common stock for $106.25 per share.
IFF, which is paying an 11 percent premium to Frutarom’s May 6 close, also will assume its net debt and the two companies are projected to have combined revenue of $5.3 billion in 2018.
ICC Industries, Frutarom’s largest shareholder with a 36 percent stake, forged a voting agreement with IFF and will vote in favor of the deal, IFF said.
It was not immediately clear how Fidelity Management and Research, the second largest stakeholder with 8.9 percent, will vote.
Frutarom sells more than 70,000 products, such as such as natural colors, health and beauty ingredients, natural food protection and enzymes, in 150 countries to mainly mid-sized companies.
Its largest customers include global names like Unilever, Nestle, and Coca-Cola as well as Israeli foodmaker Osem.
The companies said they expect to realize some $145 million of cost synergies by the third full year after closing, with about 25 percent achieved in the first full year. The deal is expected to be neutral to adjusted cash earnings per share in the first year and double-digit accretive to adjusted cash earnings per share in the second year.
The deal is expected to close in six to nine months, subject to various approvals, including by Frutarom’s shareholders.
“We believe this combination will lead to faster and more profitable growth, enhanced free cash flow and generate greater returns for our shareholders,” Fibig said.
IFF, which expects to maintain its quarterly dividend, said it will finance the cash portion of the transaction through a combination of existing cash on hand, new debt raised and about $2.2 billion in new equity. It said it had secured committed bridge financing from Morgan Stanley.
Frutarom, with a market value of $5.7 billion and which targets annual revenue of $2.25 billion by 2020, has been growing through a steady stream of acquisitions in recent years, having bought 12 firms in 2017. More than 75 percent of its sales are in natural products.
Its shares were up 1.5 percent in afternoon trading in Tel Aviv. They are up 8 percent so far in 2018 after a 65 percent jump last year.
IFF will remain headquartered in New York and maintain a presence in Israel. IFF’s shares will be listed on the New York Stock Exchange and the Tel Aviv Stock Exchange.
Frutarom CEO Ori Yehudai will be a strategic adviser to Fibig.
Greenhill & Co. and Morgan Stanley are serving as financial advisers to IFF, while Bank of America/Merrill Lynch is advising Frutarom.