Four months ago, fruit group Fyffes announced plans to split itself into two companies, saying it would create better value for shareholders. This week the separate entities are trading at a combined value above the original price and analysts expect the shares to continue rising.
Since January 2nd, when Total Produce, which comprises the former general produce and distribution division of Fyffes, was officially spun off and admitted to Dublin's IEX, shares in the remaining Fyffes business have risen by 10 per cent (as of the close of trading yesterday).
On that day, Fyffes also switched from the main market to an IEX listing, a move the company claimed would give it more freedom to develop the business and pursue acquisitions without the strict regulation that comes with a main market listing. In the same period, Total Produce shares have lost 6.5 per cent.
According to analysts and traders, investors are favouring Fyffes over Total Produce because of the potential property angle in the Fyffes story - it has a 40 per cent stake in Blackrock, the property group spun off from Fyffes in May.
However, in the long run more stable and predictable value can be found in Total Produce, according to Goodbody, which is forecasting a decline in earnings per share (eps) for Fyffes in fiscal 2007 because of the volatility in the banana market, compared with eps growth of 6 per cent for Total Produce.
According to Goodbody analyst Liam Igoe, Total Produce operates on a commission basis for produce distributed and sold. Its main products include apples and pears, vegetables and potatoes, citrus fruits and grapes in diminishing importance. Bananas, which were blamed for the decline in first-half pretax profit at the combined group following a change in the European duty regime last year, will account for just 10 per cent of sales at Total Produce, a factor Igoe believes is positive given the continuing volatility of the banana price.
Total Produce has about €45 million worth of debt on its balance sheet, leaving it significant potential for acquisitions - something which is made easier by the group's IEX listing. Unlike a main market listing, companies listed on the IEX are not required to seek shareholder approval for acquisitions, meaning Total Produce will be able to move quickly should an acquisition opportunity arise.
The remaining Fyffes business, meanwhile, will focus on tropical produce and as a result is in theory a more volatile prospect. However, the group's 40 per cent holding in Blackrock, currently valued at more than €120 million, provides an added attraction given the high profile of property currently in the Irish market.
While Goodbody is forecasting no earnings growth for Fyffes, it believes there is significant potential for merger and acquisition activity in the industry, a move it claims would release substantial cost savings in the area of transport and banana ripening.
Whatever the reasons for the recent moves in the three share prices - Blackrock is up more than 30 per cent since it became a separate entity, analysts and dealers are in no doubt that Carl McCann, former chairman of the combined Fyffes and currently chairman of Total Produce, was barking up the right tree when he said in September that the break-up of the group would enhance shareholder value.
At the start of 2006, Fyffes as it was then - all three companies combined - had a market capitalisation of €709.56 million. At the start of this year, Fyffes was worth €350.97 million, Total Produce €266.74 million and Blackrock €309.13 million, bringing the combined value of all three entities to €926.84 million, 31 per cent ahead of their value a year earlier. Add to that the fact that the combined share prices are worth more than the original company and McCann, and the group's shareholders - under the terms of the spin-off agreement, Fyffes shareholders received one share in Total Produce for every one Fyffes share held - look to be on to a winner.
Kevin McConnell, head of equity research at Bloxham, agrees, saying that the separation of the two entities will help investors understand the different parts of each company.
While there will be an initial shifting of portfolios, whereby some investors, pension funds in particular, may remove Fyffes and Total Produce from their portfolios because of the diminished size of the new groups, in the long run he expects both companies to attract new attention. "Investors are starting to recognise that there is long-term value in Total Produce, but there will be technical issues that hurt the price as there is a re-evaluation of the shareholder base," he says.
As for Fyffes, McConnell is of no doubt that property play has driven the share price so far. This is also backed up by another theory that a property investor who has been seeking to build a stake in Blackrock with a view to taking over the group is also buying into Fyffes. It's widely acknowledged that a takeover of Blackrock, which has a substantial landbank that would be attractive to any property developer, would not be possible without the support of Fyffes.
So, despite having dominated the market report for the first two weeks of 2007, the interest is not likely to end here. Goodbody estimates a fair valuation for Fyffes of €1.18 a share, with a 12-month price target of €1.25, while Total Produce's fair valuation is 78 cent, with a target of 85 cent. Given the fact the stocks closed at €1.12 and 71 cent respectively on Wednesday, the upside is definitely there.
