YAKIMA, Wash. — A major Yakima tree fruit company might be sold late in the second quarter of 2020 as part of the accelerating trend of outside investors replacing multi-generational family ownership in the Washington industry.
“It will be a majority acquisition, meaning new owners. The values will be in the hundreds and hundreds and hundreds of millions of dollars. They are probably close to 10% of industry fruit sales,” says Michael Butler, chairman and CEO of Cascadia Capital, a Seattle investment bank. “This is a well-known and well-respected company in the Yakima District, but we are getting calls from big companies in Wenatchee looking to do something, too.”
Butler says his phone continues to ring.
“In the end of November, it was hot and we didn’t think it could get any hotter but now it is hotter. We get one or two calls a week from folks wanting us to find a buyer, a merger partner or capital investor,” Butler said.
“What is happening in the industry is unprecedented. Virtually every company is considering some type of financing or merger or acquisition event,” he said.
In efforts to remain competitive, Washington tree fruit companies in recent years have spent more in new proprietary apple varieties, new orchards and new packing lines than many of them can afford.
Commercial banks won’t lend them more money and are forcing them to raise equity capital or sell to pay down loans to be able to continue as viable organizations, Butler said.
Several transactions occurred in the last two years with one of the largest being the Ontario Teachers’ Pension Plan buying Broetje Orchards, of Prescott, Wash., for more than $288 million.
The problem is exacerbated by this season’s large apple crop and declining apple prices on top of rising labor and chemical costs and to a lesser extent trade wars dampening exports last year.
Because there are many more companies looking for investors than available investors, Butler said he is reaching out to investors in the Middle East, Europe, Asia and Latin America to get them to buy into Pacific Northwest agriculture.
Water, climate, the ability to grow a great variety of crops and “the best region in North America to grow organics” are all selling points, he said.
Cascadia Capital helps companies prepare to sell themselves and helps them find the right investors who are looking for well-managed companies.
“There is a hidden pool of capital in the Middle East. There are funds there that should be buying Northwest farmland,” Butler said.
It could change the face of the Washington tree fruit industry dramatically from what Butler describes as “longtime, generational, tribal relationships of local wealthy families” like between Stemilt Growers in Wenatchee and Douglas Fruit in Pasco, to institutional ownerships with families having less control.
“A handful of larger companies say they would take a Qatar or Dubai investor as long as their money is green,” Butler said.
At the Washington State Tree Fruit Association annual meeting, Dec. 9 in Wenatchee, Ken Ballard, vice president of Northwest Farm Credit Services, said the industry is “world-class” but in a downturn with production exceeding demand. High costs, high automation and technology costs and an acceleration of variety obsolescence all drives consolidation, he said.
“There are some businesses that are extremely well positioned and they will survive and enjoy great times,” Ballard said.
Others may consider sale of non-strategic assets, infusions of family money or “outside money, and we’ve seen a lot of that,” he said.
“Finding the right investment partner is very much like a marriage. It’s critical that you do your due diligence and find the right partner,” said Jeff Fagg, owner of Columbia Business Consultants of Moses Lake.
Butler and Scott Porter, a Cascadia Capital senior vice president, said that within 18 months a maximum of six or seven companies will sell all of Washington’s tree fruit with “only four or five really counting,” meaning they will control the most volume.
They will sell to the four to five main grocery chains and if the number of grocers shrinks, tree fruit and other suppliers will as well, Butler said.
Mid-size and small Washington tree fruit companies will find capital or merge, or go out of business, they said.
Low profits and heavy debt loads are accelerating the pace, they said.
Washington Fruit & Produce Co., in Yakima, and Stemilt Growers, in Wenatchee, are well positioned to pick up “major assets for pennies on the dollar,” Butler said.
There is also a handful of tree fruit companies in Oregon looking for capital but none that he knows of in Idaho, Butler said.
Cottonwood Ag Management, owned by Microsoft co-founder Bill Gates, bought about 14,500 acres of southcentral Washington ag land from John Hancock Life Insurance Co. for $171 million in 2018.
Cottonwood also invested heavily in Stemilt Growers a year ago but with Stemilt’s Mathison family retaining majority ownership and complete control, Butler said.
“We didn’t do the deal, but we know both,” he said. “We think Stemilt is one of the smarter, best-run companies in the industry and Cottonwood is one of the smarter ag investors in the world.”