Is Eurofresh Underpriced at $51.18 Million?

On March 27, 2013, substantially all of Eurofresh’s assets will go to auction and, as it stands right now, NatureSweet has emerged as the stalking horse bidder (through Zona Acquisition) with an opening bid of $51.18 million dollars.

Eurofresh, which filed its Chapter 11 petition January 27, 2013, claims it is America’s largest greenhouse grower, spanning 318 acres of facilities. Its products include tomatoes on the vine, as well as roma, campari, beefsteak and grape tomatoes and long English and “mini” cucumbers. Eurofresh markets its products directly to major U.S. food retailers under the label “Eurofresh Farms” and “Sweet Star.” The debtor also claims its flagship facility in Wilcox, AZ is the largest single-site commercial greenhouse operation in the world with six of its greenhouses covering 274 acres. Eurofresh also operates a small wholesale business under the label Garden Fresh Selections out of a facility in Nogales, AZ that imports various types of produce from Mexico, packages that produce and then sells that produce through brokers in various wholesale channels and operates a small maquiladora facility in Agua Prieta, Mexico where some of its products are packaged.

In documents provided to the Court, Eurofresh emerged from a Chapter 11 bankruptcy in November of 2009 that resulted from a highly leveraged balance sheet, high interest rates, high energy prices and various operating issues.  Importantly, Eurofresh stated that it also faced widespread pricing declines in the industry resulting from increased competitor greenhouse acreage and “shade” tomatoes crossing the border from Mexico.

To a savvy purchaser (like NatureSweet), Eurofresh is a smart acquisition!  Operating issues can be resolved and the U.S. Department of Commerce is set to remedy (or at least significantly lessen) the tomato pricing decline issue as it relates to Mexico.  Specifically, the new Tomato Suspension Agreement was set to take effect on March 4, 2013 and that agreement carries a 42.9% increase in the minimum price for Mexican tomatoes sold into the United States’ fresh tomato market.

When this agreement becomes effective, Eurofresh and other domestic tomato companies in the fresh produce industry will be able to increase their prices without fear of losing business to Mexican growers.  As it applies to the sale of Eurofresh, the company seems to be positioned to benefit from this new agreement by gaining the ability to increase its prices without any corresponding increase in capital investments.

As I see it, this means one of two things:

(1) There should be no real reason Eurofresh cannot successfully reorganize and pay all of its creditors as it emerges from its newly filed Chapter 11 bankruptcy.

(2) NatureSweet should be applauded for positioning itself to purchase substantially all of Eurofresh’s assets (Sec. 363 Sale) in time to reap the benefits that come with the ability to increase its fresh tomato prices by about 42.9% when the new suspension agreement becomes effective, which the U.S. Department of Commerce planned on announcing March 4, 2013.

Eurofresh Seeks an Expedited Section 363 Sale

On January 28, 2013, Eurofresh, Inc. appeared before the U.S. Bankruptcy Court in Arizona and pushed for an expedited section 363 sale.  Importantly, a section 363 sale under the Bankruptcy Code occurs when the debtor seeks to sell substantially all of its assets.  This type of asset sale is often the path a debtor elects when they want “opt out” of the process for obtaining a Chapter 11 plan of reorganization in favor of what is often perceived as a quicker and more efficient process.  A section 363 sale may also be a sign that the debtor’s estate cannot afford the administrative expense of a prolonged reorganization.

In the Eurofresh bankruptcy case, the debtor intends to sell substantially all of its assets “free and clear of any liens or other interests” under section 363(f).  Section 363 will also allow Eurofresh to assign any favorable unexpired leases and executory contracts to the buyer.  This adds value to the purchase and effectuate, at least in part, the purpose of a Chapter 11 proceeding without the debtor actually complying with all of the Chapter 11 reorganization requirements.  This is not always a successful move…  Ample case-law exists where courts have refused to approve a 363 sale because the transaction appeared to be a back-door reorganization effort that significantly restructured the rights of the creditors.  When a court denies a 363 sale the debtor is forced to continue to satisfy all of the Chapter 11 requirements.

Right now, it appears that Nature Sweet is going to be the stalking horse bidder, which means they will set the price for the purchase of Eurofresh’s assets.  This does not guarantee that the stalking horse bidder will win or that the terms of the sale are not objectionable to the creditors.  These are all issues that will need to be addressed.

One such issue will be the payment of all PACA trust claims.  At this time the Court is entertaining a motion to set up a procedure for handling PACA claims, but a proposed PACA claims procedure order has not been filed.  A proper order will be critical to both the success of the section 363 sale and the debtor’s proper use of its cash collateral.  As usual, a PACA claims bar date will be set and notice will be issued.

 

Naturesweet v. Mastronardi: The New Procacci Bros. v. Chu Farms

The trademark suit filed by Naturesweet, Ltd. against Mastronardi Produce Ltd.  is merely the latest battle over intellectual property rights involving grape tomatoes, which were only introduced to the worldwide produce market in the 1990s.  

The first legal skirmish involved the right to use the term “grape tomatoes” and offers a valuable lesson on how to protect the brand image of an innovative product.

In the United States, the first “grape” tomatoes were grown in 1994 by Andrew Chu in Florida.  Chu received some “Santa F1” tomato seeds from a friend in Taiwan that were ultimately turned into the first commercially significant “grape tomatoes” – a term that Chu coined for the grape-sized tomato that distinguished the variety from cherry tomatoes.  Grape tomatoes are sweet and small with thicker skins than cherry tomatoes, which makes them more durable and, some argue, more flavorful.

In 1998, Chu filed a trademark application with the U.S. Patent & Trademark office for the term “grape tomatoes.”  In hindsight, this might appear misguided because that term presently describes an entire class of tomato and is thus not capable of trademark protection.  At the time, however, it was a new term coined by Chu that he wanted applied only to his “Santa F1” tomatoes.  In fact, the trademark office agreed and issued Chu a trademark registration in March 2000 for “small fresh tomatoes shaped like grapes.”  This meant that Chu had the exclusive right to use this term in the United States in connection with his tomatoes.

Almost immediately, however, Procacci Brothers Sales Corp. challenged Chu’s trademark rights in federal court, arguing that the registration should be cancelled because “grape tomatoes” was a generic or merely descriptive term and thus did not identify the source of the produce.  After a relatively brief court battle, Chu Farms surrendered or otherwise lost any claim it may have had to an exclusive right to use the term “grape tomatoes,” which allowed anyone else to use this term to describe tomatoes of similar size and shape.  

The take away here is that there is significant value in exclusivity and protecting innovation should be of paramount concern to the produce industry.  As we all know, the produce industry is fairly unique in that many of the products look very similar.  The key differences are found in the taste, quality, safety, appearance and other similar factors that may not be readily identifiable pre-sale.  Therefore, the importance of packaging and related marketing innovations are vital to produce companies and they should be protected.  Protecting your intellectual property not only helps define a produce company in a competitive marketplace, but it also ensures that the company receives the benefits of its investments in innovation, quality and food safety. 

NatureSweet v. Mastronardi Produce

Creativity + Innovation = Goodwill

On May 8, 2012, NatureSweet filed a civil action against Mastronardi Produce alleging trademark infringement.  Specifically, NatureSweet alleges that Mastronardi’s “Angel Sweet” mark and its winged tomato design mark infringes upon and otherwise trades upon NatureSweet’s “Nature Sweet Cherubs” brand tomatoes. 

At its core, the complaint alleges that Mastronardi’s packaging causes confusion in the marketplace and allows Mastronardi to trade on NatureSweet’s goodwill, which is a result of NatureSweet’s brand recognition in the retail segment.  In support of this claim, NatureSweet’s complaint discusses NatureSweet’s portfolio of patents and trademarks.  As a matter of fact, NatureSweet reported to the Packer that its Cherubs brand generates about $300 million in annual sales.    The Packer

 As this case unfolds, the take away here is that branding in the produce industry is critical because it is such a fast paced and highly competitive industry.  And, as NatureSweet intends to show, there are ways to distinguish produce in the marketplace that go beyond taste and quality.  Boasting $300 million in sales from the Cherub brand alone, it is clear that a proper intellectual property portfolio is capable of generating significant revenues that are capable of protection.