When an acquisition is announced, the buyer in the deal usually sees its share price fall, while that of the target rises. After all, the selling company almost always is getting a premium to its price before the deal announcement – but the premium comes from the value of the acquiring company (and its shareholders).
And, while the executives leading the deal will usually argue that it creates value, corporate history suggests that roughly three-quarters of acquisitions wind up failing; that broadly negative history usually overrides any individual arguments executives might make about the wisdom and/or price of the deal they specifically are making.
When Mission Produce announced last month that it was acquiring smaller Calavo Growers in a stock-and-cash deal, the market’s initial reaction was typical. Calavo stock jumped 13% on the day; at one point in early trading, Mission shares were down 18%. But very quickly investors reversed their opinion: within a few days, Mission stock was above its pre-acquisition price, and shares now (even in a soft market) trade almost 6% higher than they did before the acquisition was announced.
Put another way, Mission paid a premium of over $50 million for Calavo’s business – and has seen its market value rise over $50 million in the process. Obviously, with some time to consider the acquisition, the market thinks it was a smart move.
Inside Mission Produce’s High‑Conviction Calavo Play
From here, the market’s assessment seems correct – for several reasons. First, there is a significant amount of potential cost savings. Mission thinks it can achieve at least $25 million in synergies from the merger. Unfortunately, some of those savings will come from layoffs, but other costs can be cut as well. (Simply being a public company creates expenses of several million dollars a year.)
The savings are significant: the two companies combined have averaged a little over $30 million in annual free cash flow over the past three years.
The merged company should benefit from scale as it competes against Fresh Del Monte, the leader in the category.
The acquisition also brings on two new packhouses from Calavo and additional fruit supply in Mexico and California. This does look like a potentially stronger competitor – and that is important given the industry can be challenging. Certainly, stocks in the group have not done well: Dole (disclosure: I own shares in Dole) trades at its initial offering price from 2021. The recent rally pushed Mission back above its own IPO price in 2020; even with dividends, Fresh Del Monte has returned an average of about 2% a year over the last decade.
And the core problem is simply that the industry is difficult. Weather can be a huge factor, profits and revenue can be volatile, and political developments can drive big effects (tariffs, cartel activity, etc.). Even with avocado demand growing steadily, consistent earnings growth is hard to come by. And so a merger like this for Mission is the most obvious way (and perhaps the only way) to create a better underlying business that can both generate more cash flow and see investors place a higher valuation on that cash flow.
A Smarter Produce Play
The potential for the two companies to be stronger together than separate is augmented by a key strategic catalyst for the deal. As Mission executives noted repeatedly on the conference call held to discuss the merger, Calavo has a prepared food business, while Mission essentially doesn’t. Calavo’s operations are not huge, certainly: the $71 million of revenue in the last fiscal year accounted for less than 12% of Calavo’s sales; The figure is only about 3.5% of the combined company’s sales in fiscal 2025 (ending October).
But the existing prepared foods operations do create a pathway for Mission to build out that business. Not only would that revenue, but in the eyes of investors it would add better revenue. Prepared foods offer both higher margins and, importantly, more consistent demand and costs. Investors are usually willing to pay more for that consistency.
Indeed, in the meat processing industry Smithfield has detailed a similar focus. The likes of Tyson and Hormel similarly have prioritized that category. Mission could have built out its own business, certainly, but bolting on Calavo is a quicker and likely more efficient way to do this. Processed foods can drive growth, but they also give investors a reason to be more interested in a category that hasn’t provided great returns or high valuations.
All told, this simply seems like a smart move, and though it took two weeks, the market seems to have come around to that opinion. The complementary nature of the businesses, the importance of scale, and the potential catalyst from prepared foods all make this a deal with real logic behind it.
It’s worth reiterating: most acquisitions fail. It’s difficult to integrate employees, operations, and culture. But, at least in the early going, the market believes that Mission’s purchase of Calavo should be an exception to the rule. Given the logic behind the tie-up, it’s not hard to see why investors are cheering.
Editor’s note: Vince Martin is an analyst and author whose work has appeared on multiple financial industry websites for more than a decade; he’s currently the lead writer for Wall Street & Main. As of this writing, he owns shares in Dole plc.
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