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Itochu in Talks With Dole to Acquire Asian, Food Units

Itochu (8001) Corp., the third-largest trading house in Japan, is in talks to buy Dole Food Co. (DOLE)’s global processed food unit as well as its fruit and vegetable business in Asia to add more consumer assets.

Itochu expects to complete the deal around November, the Tokyo-based company said today in a statement. Dole’s in “advanced negotiations” for the sale, which is part of an earlier announced strategic review, the Westlake Village, California-based company said yesterday in a statement. The deal may be worth $1.7 billion, Nikkei reported today without citing anyone.

Japan’s major trading houses are expanding into food to add to iron ore, coal and oil sales that dominate their profits as a way to cushion against economic downturns. Marubeni Corp. (8002) beat Asian rivals to secure U.S. grain merchandiser Gavilon Group LLC for $5.6 billion in May. Mitsui & Co. took control of Brazil’s Multigrain SA in 2011.

“Diversification of their non-resource portfolio has become an issue for all the trading houses,” said Mitsuru Miyazaki, an analyst with SMBC Friend Research Center Ltd. in Tokyo. “It’s not about quick profit expansion, it’s about building a stronger profit base.”

Pineapples, Bananas

Dole’s packaged foods business may be worth $990 million and return about $110 million in earnings before interest, tax, depreciation and amortization a year, New York-based fund manager Three Court LP said in a July report. The unit is undervalued in the overall commodity business of Dole, which is the world’s top supplier of fresh fruit and vegetables, the report said.

The Asian operations of Dole, controlled by 89-year-old Chairman David Murdock, include pineapple and banana farms in the Philippines as well as ripening and distribution centers in Japan, South Korea, China, Australia, Taiwan and Thailand, according to a 2009 document on the company’s website. Dole’s Japan and Korea business generated $998.5 million in sales last year, according to data compiled by Bloomberg.

Itochu, which gets more than half its profit from metal and energy commodities, made its biggest purchase in a decade in March last year in buying U.K. tire retailer Kwik-Fit Group Ltd. for 637 million pounds ($1.03 billion).

Chief Executive Officer Masahiro Okafuji said in May that while resources have helped the company forge ahead of rivals, it will need to find more balanced growth to keep the momentum. Itochu last year overtook Sumitomo Corp. (8053) as Japan’s third- largest trader after Mitsubishi and Mitsui.

“It’s not just a case of saying: ‘China and resources’ and that’s it,” Okafuji told investors and analysts in Tokyo on May 11.

Food Trader

Itochu aims to almost double profit to 40 billion yen ($514 million) in three years from food businesses that include Japan’s third-largest convenience-store chain FamilyMart Co., according to Itochu’s annual report.

The food unit had net income of 22.4 billion yen in the 12 months ending March 31, contributing 7.5 percent to Itochu’s record profit of 300.5 billion yen for the fiscal year. Itochu trades wheat, vegetable oils, soybean, sugar and beverages and co-owns a Chinese beer business with Asahi Group Holdings Ltd., according to its annual report.

The Japanese company has also helped Dole market bananas in Japan, Heather L. Jones , an analyst at BB&T Capital Markets in Richmond, Virginia, said yesterday in a note.

Itochu climbed 0.8 percent to 806 yen in Tokyo, beating the 0.4 percent increase in the Nikkei 225 index. Dole gained 9.5 percent to $14.07 yesterday.

“No definitive agreements have been signed at this time, and Dole continues in discussions with several other parties regarding these assets and others,” Dole said. The details of the deal are yet to be agreed on, Itochu spokesman Masaaki Yamashita said by phone today in Tokyo.

Sale, Spinoff

Dole said July 19 it was considering a potential sale or spinoff of the packaged-foods unit and hired Deutsche Bank AG and Wells Fargo & Co. as advisers. It said at the time that options under consideration included the separation of the packaged-foods unit in combination with its Asian operations and creating a stand-alone company either via a joint venture with third parties or an initial public offering in Asia.

A sale for $1.7 billion would value Dole’s Asian fresh produce business at seven times “normalized” earnings before interest, taxes, depreciation and amortization, and nine times Ebitda for the packaged foods unit, BB&T’s Jones said in the note.

“Those multiples are at the high end of what we anticipated the company would garner,” said Jones, who rates the shares hold.

To contact the reporters on this story: Yuriy Humber in Tokyo at yhumber@bloomberg.net; Ichiro Suzuki in Tokyo at isuzuki@bloomberg.net

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net; Jason Rogers at jrogers73@bloomberg.net

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