US cranberry juice producer Northland Cranberries has expressed an interest in making a bid for the juice business of rival Ocean Spray. But the latter group has chosen to see the bid as just that - an expression of interest - rather than a formal offer.
Responding to speculation in the press, Northland confirmed last week that it had tabled a bid for Ocean Spray's juice business on 21 February, a bid which consisted of three different elements.
Firstly, Northland has proposed a purchase price equal to Ocean Spray's net juice sales for the 12-month period ending February 28, 2003, which Northland estimates to be approximately $800 million. At least 55 per cent of this purchase price would be paid in cash and the remainder would be paid in the form shares.
Secondly, Northland has proposed to enter into a 15-year supply agreement (with an unlimited number of mutual five-year renewal options) with Ocean Spray, which means that Northland would purchase 2-3 million barrels of cranberries each year. The company would pay an initial price of $35 per barrel for the first year, increasing by $1 per barrel for each of the next four years and by $0.50 per barrel for each of the next 10 years. Northland would also agree to purchase all of its requirements for grapefruit from Ocean Spray at the then current market price.
Thirdly, Northland has proposed to enter into a royalty agreement whereby it would pay Ocean Spray each year an amount equal to 3 per cent of Northland's net sales and license fees on all of its sales and licensing of new non-juice products using the Ocean Spray brand name. Ocean Spray would also retain the right under a perpetual licence to use the brand name for its non-juice products.
"We believe that this proposal is in the best interest of both companies," said John Swendrowski, Northland's chairman and CEO. "Our estimated $800 million purchase price represents a gross value to Ocean Spray's grower-members of over $200 per share. In addition, our 15-year commitment to buy cranberries from Ocean Spray at an initial first-year price of $35 per barrel, and ultimately increasing to a price of $44.00 per barrel, should result in substantially increased per barrel prices payable to Ocean Spray's grower-members for the foreseeable future.
"Our offer is also structured to provide Ocean Spray's grower-members a direct equity interest in our combined juice business and thereby enjoy the future potential financial upside from our combined operations and marketing power as an ongoing business with its primary focus on selling cranberry-based juice products."
He added that the deal would also allow Ocean Spray to continue to operate its existing non-juice business (such as fresh cranberries and cranberry sauce) as well as all the grapefruit, cranberries and cranberry concentrate not bought by Northland as part of the deal.
"We look forward to meeting with Ocean Spray's representatives to discuss this proposal and explore potential alternatives that they believe might even further enhance the value of this transaction for Ocean Spray and its grower-members' benefit," Swendrowski added.
Although Ocean Spray is bigger than Northland, that has not protected it from a slump in the market caused by declining cranberry prices. Combining the two companies' juice businesses seems to make sense, as it would give them around 55 per cent of the cranberry juice market, Swendrowski said.
While there has been little comment from Ocean Spray, Chris Phillips, a spokesperson for the company, is reported as saying that the bid was not being considered as a formal offer for the company but rather as a statement of interest on the part of Northland.