Behind the corporate veil/Croesus:Major changes in EU banana import regulations left fruit importer and distributor Fyffes facing an extremely challenging environment in 2006.

Deregulation of the EU banana regime led to a collapse EU banana prices and profit margins.

Fyffes management signalled the market that as a result of these adverse developments, profits would drop by approximately €64 million.

Fyffes profits took a further hit from cost pressures, particularly fuel costs, and adverse movements in exchange rates.

Not surprisingly, the share price fell sharply in the first half last year. In early October 2005 the shares traded as high as 2.60, reflecting very strong trading conditions during 2005.

By the end of that year, the expectation of changes in the EU tariff regime saw it drift back to €2.30.

The reality of much lower banana prices and profit margins led to further weakness with the shares trading around 2 by early May.

The board's response was to adopt a radical strategy of demerging the business into three separate plcs - namely, Blackrock International Land, Total Produce and Fyffes.

Last May all the company's property interests were demerged into Blackrock and in December the general produce business was demerged into a separate plc called Total Produce. The demergers were done on a share-for-share basis.

Therefore, a shareholder who originally held 10,000 shares in Fyffes, now holds 10,000 shares each of Blackrock, Total Produce and Fyffes, all of which are listed on London's AIM and Dublin's IEX.

This has the advantage of simplifying comparisons with previous years, as the sum of the share prices of the three new entities is comparable with the historic Fyffes share price.

Blackrock currently trades about 47 cent, Total Produce at 80 cent and Fyffes at 111 cent - a combined value of €2.38. This is below the 2005 high but well above the lows of mid-2006.

All three entities have now published results covering 2006. Looking at the figures for  the combined Fyffes/Total Produce operation, trading results were in line with guided market expectations. Revenues, excluding joint ventures and associates, rose from €1,742 million in 2005 to €1,985 million in 2006, but adjusted profit before tax fell from €122.2 million to €58.4 million, a drop of €63.8 million.

In terms of earnings per share EPS), this translated into a decline to 11.4 cent from 25.14 cent. In light of these results, the likelihood is that the "old" Fyffes share price would be trading far below its current notional level if the demerger had not taken place.

A key objective of the demerger was to enhance focus, thus allowing the separate companies to pursue distinct growth strategies. The early evidence is that the new management teams have taken to their tasks enthusiastically. The demerged property business, Blackrock International, has made several property investments since the May listing.

Its market value has risen by over 20 per cent to a current market capitalisation of €290 million. Results announced on February 15th revealed its net asset value had increased by 6.8 per cent to 37.9 cent.

Since listing, the company has invested €193 million in new property ventures and plans to spend a further ¤200 million over the next two years.

Management's medium-term target is a gross asset value of €1 billion within four to five years.

The share price is currently trading at a large premium to the net asset value per share.

Some premium is justified reflecting the development potential lying unlocked in the older properties, and the "hope" value in the management's aggressive expansion plans.

The medium-term prospects for property returns look good and therefore the shares are worth investing in at prices below 50 cents.

Of the two core demerged entities, Total Produce looks to be the more interesting.

Brokers forecast that revenues of €1,577 million in 2006 will increase to more than ¤2 billion in 2007, with much of the increase due to acquisitions.

Total Produce is the leading fresh produce company in Ireland, Spain, Sweden, Denmark and the Czech Republic and it has substantial operations in the Netherlands, Britain, Italy and Slovakia. It also owns 50 per cent of Capespan Europe, the leading South African company. The company's five-year goal is to double sales to €4 billion.

Although the three entities are now separate, they are closely interlinked and there are arm's length commercial arrangements in place covering these interrelationships. Fyffes plc also holds a 40 per cent stake in Blackrock.

The most visible sign of this symbiotic relationship is the continued iron grip of the McCann family with David McCann, chairman of Fyffes, Carl McCann, chairman of Total Produce, and Carl McCann, executive chairman of Blackrock.