Fyffes seeks to offset impact of tariffs

Opinion: Today's results from fruit importer Fyffes, still smarting from its very costly High Court action against DCC, should not surprise anyone.

However, as the latest results go into the annals of history, what is important is what lies ahead. The most important question is: can the company move away from its dismal share performance?

With the European Commission's decision to introduce a tariff of €176 per tonne on imports of third-country bananas from the start of this year, it is definitely facing an immediate negative on that front. Today's preliminary statement should provide further details on the impact and how the group intends to counteract it.

However, that negative aura should be partially offset by Fyffes's plan to establish a new, separately quoted property company, Bluestone Properties, with initial assets of some €200 million. At first glace, a mere €200 million property for a new publicly quoted group with its shares quoted on London's Alernative Investment Market and on Dublin's Irish Enterprise Exchange, is minuscule.

So is Fyffes just tinkering around with its assets, or should it not use the €200 million cash in its balance sheet to diversify away from its traditional business, which is facing intense competition and uncertain times, like IAWS did with Cuisine de France? Indeed, in sharp contrast with Fyffes, IAWS's share price has rightly been outperforming the market.

Fyffes should probably do both, but hiving off some of its properties appears to make sound sense. First, it will be capitalising on today's market, which is insatiable for investment in properties. Secondly, the stream of income from the properties that it is giving up to the new listed company is minute.

Figures released by Fyffes show the loss in annual adjusted earnings per share as a result of the divestiture of the properties will be about 0.8 cent per share. On the basis of a group earnings per share of some 23 cent, the dilution is a mere 3.5 per cent. So the group loses little earnings, but by having a separate property company it is getting value in terms of net assets backed by a share price.

Bluestone will be 40 per cent owned by Fyffes - equivalent to €0.23 per share - and 60 per cent by existing Fyffes shareholders, equivalent to €0.34 per share. It will initially own about 25 properties, many of which produce no income, so the focus will be on the sale and purchase of assets. The initial portfolio of €200 million appears small, but starting with no borrowings, it will have the capacity to gear up. Theoretically, totally geared it could have a €1 billion company, but that is a long way off and it would first have to find suitable properties to purchase.

With Fyffes's chairman Carl McCann taking the chair of the new company, is there not what could be perceived as a potential conflict of interest? What, for example, would happen when there are rent reviews on properties leased to Fyffes and owned by Bluestone?

Separate valuers should erase any potential problems. Also, Fyffes has said it will enter into arm's length lease agreements for the properties which currently produce business. In addition, it is intended that independent directors will comprise the majority of Bluestone's board.

Fyffes shareholders should have comprehensive information about the new company when details are circulated later this month. An extraordinary general meeting three weeks later will set the company in motion.

It is understood that the 40 per cent held by Fyffes is an initial holding. This could well be diluted with more shares going to Fyffes' shareholders in time. That would be a welcome move.

The setting up of the company will have an impact on Fyffes's balance sheet. The 25 properties have a market valuation of €190 million compared with a book value of some €110 million. Taking deferred tax into account, there should be a surplus of some €70 million.

Fyffes has said its duty costs will increase by €40 million as a result of new EU banana rules. Other extra costs will amount to €15 million. But the crux will be the degree to which the group can recoup these costs from its suppliers and customers.

Its room for manoeuvre appears limited. Already this year, for example, German prices for bananas have increased by just 2 per cent, considerably below the tariff increases of 10 per cent. In time this might be ironed out, but this year margins and earnings should be substantially reduced.

It is against this background that Bluestone will be launched. Fyffes is valued at €750 million. When Bluestone's shares are quoted, technically Fyffes should be valued at €630 million. The property company will get off to a good start if Fyffes's valuation is unchanged and Bluestone's shares are quoted at a premium to the net assets, so that the sum of the parts is greater than the whole.

But property companies go through cycles, and when the downturn arrives it is the norm for property share prices to be quoted at a discount to net asset value. No sign of that happening just now, and if the enterprising moves of Fyffes and McCann are successful, it could well be emulated by other companies that have property assets locked away in their balance sheets with little recognition of their value.