When strawberries go south: A massive bankruptcy in California

In the first of a series of case studies, we look at what led to the collapse of Eclipse Berry Farms, which at its peak generated $230m in revenue from its growing operations.

At the beginning of last year, Eclipse Berry Farms counted among the largest growers, processors, marketers and shippers of strawberries in the US. Yet in January 2018, it filed under Chapter 11 bankruptcy protection to help it complete its liquidation process. What happened in between?

Eclipse’s troubles started with the death of its chief executive and primary equity holder, in early 2017. The other founder had passed away in 2012.

At the time, however, the farm was a mighty player in the industry: it leased and farmed more than 2,500 acres of land in Oxnard, Salinas and Santa Maria, California, and employed 3,000 staff. It generated $230 million in revenue from its growing operations, with additional cash produced via import programs from Mexico and berry processing operations.

So when the widows decided to sell the farm – a transaction officially launched in mid-May – they did so from a position of strength.

“They were coming off what was a pretty good 2016 crop year – although in the second half of 2016 we’d started to see some stress and a combination of high land costs and some new plant varieties that came on that were producing at a very high level,” Ken Nofziger, head of Murray Wise Capital, the bankruptcy-focused firm that managed the sale, tells Agri Investor.

“We had some pretty good interest from a wide variety of buyers, including trade players from Europe and private equity funds.” The group comprised many of the world’s largest financial and strategic investors of fresh produce operations. By mid-July, MWC had received seven non-binding expressions of interest from the company’s assets, valuing it at between $45 million and $60 million.

Perfect storm

By then, however, the strawberry markets had already started to turn. That owed a lot to overproduction of berries from both domestic and foreign growers. But harsh growing conditions from the La Niña climatic phenomenon also resulted in lower-quality crops in California, putting the region even more on the back foot.

“Strawberry prices really turned south quickly in April and May of last year. So they [Eclipse] went from making a reasonable profit to some pretty significant losses,” says Nofziger.

Two or three months later, banks took fright, announcing they would not renew the farm’s longstanding credit lines. Yet, these were essential to the company’s continued operations.

“They didn’t have the capital they needed to put next year’s crop in the ground. And it takes, you know, $25 million to $35 million for these guys to get that next year’s crop in the ground,” says Nofziger.

As a result of the loss of financing and paltry financial results, indications of interest for the purchase of the company’s assets were no longer feasible as submitted. MWC advised the sellers to consider alternatives, including an orderly wind-down. “We basically went into liquidation mode of the business,” says Nofziger.

Eclipse appointed a third-party chief restructuring officer, who, along with the company’s management team, took action to complete and wind down the 2017 crop harvest, find transaction partners to assume ongoing leases and reimburse Eclipse for 2018 crop expenses incurred, meet other crop liabilities and sell off any other assets available.

A key plank of the operation was the sale of certain leases to Superior Fruit. Still pending, it is set to result in the recovery of more than $10 million in value. “Now you’re looking at a range of $18 million and $20 million in cash that’s going to be recovered, on a total of $50 million dollars. It happened that quick,” says Nofziger.

The company’s assets comprise intellectual property, customer relationships and a bunch of leases they control. One of the key issues it has faced in the liquidation process is that it did not own any of its land, says Nofziger. “Land prices went through the roof, and rents were extremely high. So it’s a combination of things that led to an unfortunate end.”