Analysis

After 49,000 Percent Growth, Why Did Israeli Flavor Firm Frutarom Sell Itself?

The phenomenal valuation growth was based on a dizzying acquisition spree by longtime CEO Ori Yehudai and a shrewd reading of the flavor and fragrances industry

Frutarom's offices in Israel, May 7, 2018.
rami shllush

Exactly 22 years after the Israeli flavoring extract firm Frutarom was listed on the Tel Aviv Stock Exchange at a company valuation of $13 million, the firm’s board voted unanimously to sell the company to U.S.-based International Flavors and Fragrances for $6.4 billion. When the value of Frutarom’s net debt is factored in, the figure comes to $7.1 billion.

That’s an increase in value of 48,900% – 545 times – since 1996, a story of the greatest creation of corporate value in the history of the Tel Aviv Stock Exchange.

The jump in Frutarom’s share price over the past three years has been so robust that the stock reached 6.5% of the value of the blue-chip Tel Aviv-35 index. It thus blunted the damage caused by the woes at the index’s giant, Teva Pharmaceutical Industries.

The company value created by Frutarom was based on a dizzying acquisition spree led by the firm’s CEO over 22 years, Ori Yehudai, and by a shrewd reading of trends in the global food market. Since 2011, Frutarom snapped up $1.1 billion worth of companies, most of them small or midsize firms with annual sales under $100 million. Frutarom targeted a growing segment of the market that included not only small and midsize companies but also firms that produced private-label-brand products for retail chains.

Unlike giants such as IFF, which is acquiring Frutarom, and the Swiss firm Givaudan, Frutarom correctly gauged the shift in consumer preferences toward healthier food based on natural raw ingredients, natural food colorings and antioxidants, or at least claims that such products are healthy.

And it did so in a timely manner. Another positive was Frutarom’s long-term ties to growers of natural raw ingredients. The move let the Israeli company track the quality of the ingredients from the beginning of the process – from the fields on which they’re grown. It also reduced the cost of buying the raw materials by 50%.

Frutarom also built an impressive geographic presence through 74 plants in 60 countries in Western and Eastern Europe, Latin America and India. That led to 120% growth in sales to $1.4 billion between 2012 and 2017 and a 196% increase in net profit to $154 million. The acquisition spree laid the foundations for strong organic growth of 7% over the past two years, making the company’s annual target of $2.25 billion in sales and $500 million in current operating profit by 2020 realistic.

But if that’s the case, what led Yehudai, the CEO, to sell the company despite its potential for profit growth and thus overall valuation?

One of them concerns the age of the company’s controlling shareholder, John Farber, who owns 39.7% of Frutarom through his firm ICC. It’s thought that the increase in the company’s stock price meant that it made up far more than 50% of the family holding company’s portfolio. IFF’s offer for Frutarom was an excellent reason to sell.

After 32 years with the company, including 22 as CEO, Yehudai can demonstrate a boost in the company’s value that few can match, and he could emerge from the deal a wealthy man, as will probably be shown when the details of his compensation are released shortly.

In addition, the fact that Frutarom complements IFF when it comes to the Israeli company’s strengths – natural raw ingredients, small and midsize clients and a broad geographic presence – could help the two companies create additional value growth for Frutarom shareholders, who will get a third of their compensation in IFF shares.