The South African fresh fruit distributor Capespan is to take an initial 4.8 per cent stake in Fyffes and later as much as 8 per cent, as part a strategic alliance which will see Fyffes buy 50 per cent of Capespan's European distribution subsidiary and also a 10 per cent equity stake in the parent Capespan company for a total of £40 million.

Fyffes already distributes Capespan's Outspan and Cape apples, pears, grapes, citrus and soft fruits, but the cross-shareholding arrangements cement the relationship between the two groups and follows the appointment earlier this year of Fyffes chairman Mr Neil McCann to the board of one of the companies that merged to form Capespan.

The financial arrangement between the two companies is complex, but the first element involves Fyffes buying 50 per cent of Capespan International Holdings, the European subsidiary of Capespan, for an initial £13.5 million payable in Fyffes shares. A further £13.5 million deferred payment in Fyffes shares will fall due in 2003 if Capespan notches up average pre-tax profits of £9 million in the period between 2000 and 2002.

The initial issue of Fyffes shares is equivalent to 3.3 per cent of the equity at the current price of 140p. It is difficult to estimate how much of Fyffes the £13.5 million deferred payment will be worth in four years time, but at the current share price it is equivalent to 3.3 per cent.

Capespan International is based in Britain and has sales of £450 million and accounts for the year to the end of September showed profits of £1 million. Under the trading arrangement between Fyffes and Capespan, pre-tax profits in the first year following the transaction are expected to be £5 million.

The second element of the deal sees Fyffes invest £12.2 million - half in shares and half in cash - for 10 per cent of Capespan Group Holdings, the company recently formed from the merger between two South African group's, Outspan International and Unifruco. A further £1.2 million in cash will be paid if Capespan pre-tax profits exceed £27.8 million in any of the years between 1999 and 2001. The £6.1 million shares element of the initial consideration in equivalent to 1.6 per cent of Fyffes at the current share price.

This is the first time that Fyffes has formed a formal equity relationship with a South African company. Most of the Irish group's deals in Europe have involved taking stakes in small to medium-sized companies, which have ultimately lead to full take-overs.