Business Opinion: The demerger by Fyffes of its property interests into a separate quoted company looks on the surface like a winner for Fyffes shareholders, given the ongoing property boom and the lack of property companies on the Irish market, writes John McManus

However, like all gift horses, it deserves a good dental exam. This is particularly true if you give some credence to the proposition that the split is to a greater or lesser extent being forced on Fyffes by the market following revelations in the Fyffes DCC case. For those readers who have forgotten, Fyffes was forced into making some candid admissions during the course of the insider dealing trial about its approach to keeping the market informed of its activities.

In particular the extent to which its figures were influenced, if not flattered, by property transactions rather than the performance of the underlying business became apparent. Indeed it is interesting to note in his letter to shareholders recommending the demerger that Fyffes' chairman Carl McCann points out that the demerger will provide greater transparency and "enable investors to separately evaluate the property activities and the fresh produce business".

Two questions seem pertinent when trying to assess if Blackrock International Land - as the spin-off will be called - will be a good investment. The first is how independent of Fyffes is this new company and the second, related question is how capable is it of fulfilling its stated intention of seeking leveraged property development opportunities.

At the level of the board, it is a mixed bag on the independence front. Three of the seven directors are connected to Fyffes. Carl McCann will become executive chairman of the new group, while Fyffes company secretary Philip Halpenny is a non-executive director. Declan McCourt, a Fyffes non-executive director is also a non-executive director of Blackrock. The other four directors are independent, although the managing director Robert Knox is a former Fyffes executive.

But at the operational level it becomes clear that Blackrock is a vassal of Fyffes. As the demerger circular points out, some 14 of the 30 properties being transferred into the company are rented to Fyffes and they account for 82 per cent of projected operating income.

The extent to which Blackrock is dependent on Fyffes becomes even clearer when you look at the valuations in the circular. The properties leased to Fyffes account for around €120 million of the company's property assets of €197 million. All of these valuations are subject to a "special assumption" that Fyffes will rent them for periods of up to almost 10 years.

When you add in that Fyffes will own 40 per cent of Blackrock after the spin-off it is clear that Blackrock may be Fyffes' landlord, but the balance of power lies with the tenant.

Anybody contemplating becoming a shareholder in Blackrock might want to think about that. Given that they will by definition also be shareholders in Fyffes, they may not be unduly worried (Current Fyffes shareholders will get 60 per cent of the shares in Blackrock and Fyffes will hold the balance). After all, what they lose on the Blackrock merry-go-round, they will gain on the Fyffes swing.

But they would be well advised to consider what the implications of this are for the future performance of Blackrock's share price. Anyone who is not a Fyffes shareholder, might not be quite so comfortable with the arrangement and it may act as a drag on the shares post flotation.

The counter argument is that the real driver of any property company is not its rent roll, but its development profits. Once they start to materialise, the close relationship with Fyffes will be immaterial and in the meantime the Fyffes' tenancies can provide solid income.

In fact, so the argument goes, the financial muscle of its large shareholder cum tenant should help Blackrock leverage up at attractive rates to pursue deals.

But, take this line of reasoning further and it calls into question the commercial logic of the deal. Why does it make sense for a company like Fyffes, which can borrow relatively cheaply - and has cash in abundance - to float off its development sites into a small company that will have to take out significant and more expensive borrowings..

In addition there is nothing in the track record of small quoted Irish property companies to suggest that Blackrock will ever achieve a stock market valuation that reflects the value of its assets. Green Property and Dunloe Ewart are two good examples of the opposite.

Prospective Blackrock shareholders might also ask the question why, if a small quoted development company is such a good idea, has nobody else put one together in the current climate. Rather than seek public listings successful Irish property developers prefer unlimited private companies, which are about as far away from the public eye as you can get.

The demerger of Blackrock will bring transparency to Fyffes, which is a good thing, but it may be at a significant cost.

jmcmanus@irish-times.ie