Business Opinion: After what some would regard as several decades of underperformance Fyffes has finally been galvanised into action. It floated off its property interests earlier this year and has now decided to split the remaining business into two separate quoted companies, writes John McManus.
The question has to be: why now? What has happened to make the company abandon the strategy of incremental growth mainly via small acquisitions that it has followed for so long. One thing that has differentiated Fyffes over the years was the way in which the control exerted by the McCann family meant the group could resist pressure to do big deals and take a long-term approach to building the business.
A number of things have happened in the last few years that undoubtedly had a bearing. The baton has well and truly passed from the company's founder Neil McCann to his two sons Carl and David, who are chairman and chief executive respectively.
Another big event has been the public falling out with Jim Flavin and DCC over the sale of DCC's shares in Fyffes. The subsequent insider-dealing action taken by Fyffes was a bruising affair and the company suffered some collateral damage as a result of embarrassing revelations about how it controlled the flow of information to shareholders. In particular some light was shone on the extent to which the companies' property dealings could mask the performance of the underlying business.
While these two factors undoubtedly set the backdrop for last week's demerger announcement they are not significant factors, according to Fyffes insiders. The trigger for the decision to split the group into its tropical fruit and other produce business was the changes in the EU banana regime which added something like €40 million a year to Fyffe's duty costs. This has started to feed into the company's figures and was blamed last week for the 50 per cent fall in first-half profits.
The choice was pretty simple, according to Carl McCann, the company could ask its shareholders to accept a significant step down in profits going forward or it could do something imaginative. They chose the second option and took the Dublin market by surprise.
The decision was eased by the success - in their eyes - of the flotation of the bulk of the group's property portfolio as Blackrock International Land. Fyffes is of the view that this has created 35 cent per share of additional value for Fyffes shareholders.
They are equally convinced that the splitting of the latest business will unlock some 40 cents per share that is not reflected in the current share price of around 165 cents.
Everybody else, however, seems to be a bit confused, not least house broker Davy. They note the company will be split into a general produce business with revenues of €1.7 billion and earnings before interest, tax and amortisation (ebitda) of €36.3 million last year. Underlying growth is modest in this business and significant increases in earnings would require acquisitions.
The other half of the business, tropical fruits, is expected to have sales of €500 million and ebitda of €20 million this year. This is the part of the business that is exposed to the new duty regime and Davy says it's prudent to think in terms of a plus or minus €10 million range for ebitda.
But when it comes to the 200 cent sum of the parts valuation put forward by Fyffes, Davy puts its hands up: "We do not know if 200 cent is the correct valuation. The changed circumstances should mean a change in price and intuitively we feel it should be higher than it was before the announcement".
The case for the demerger is far from self evident and the sort of valuations that Fyffes are hoping to achieve from the two businesses (14 times earnings for for general produce business and 11 times earnings for the tropical division) will require good management and luck.
The argument against the demerger - and demergers in general - however, is attractively simple. There is a presumption underlying the split that the market has got it badly wrong and consistently failed to see the value in Fyffes. This is a brave assumption as the market is not usually wrong, and if it is wrong, it is usually not so for long.
Fyffes detractors would argue there are specific reasons for its underperformance - such as the McCann family's controlling stake - that will not be resolved by splitting up the company.
But supporters of the demerger are not short of an aphorism or two either. Not least that the market always gets things wrong, and if it doesn't, how do you explain the wave of leverage buyouts currently sweeping the globe. Private equity has demonstrated time and again that there is value to be extracted from underperforming quoted companies.
It's a point not lost on Fyffes. As one insider put it last week; "If we didn't do it [ the demerger] then somebody would come along and do it for us".
Maybe they still could.
