Sunday 19 November 2017

FBD to spin off volatile property and leisure arm into joint venture


Laura Noonan

Laura Noonan

FBD is planning to spin off its volatile property and leisure business into a new joint venture with its biggest shareholder Farmers Business Development.

The plc unveiled the dramatic proposals yesterday as it wooed investors with expectation-beating first-half results, higher earnings forecasts for the rest of the year and promises of a 7.5pc hike in its interim dividend.

Markets responded enthusiastically, with shares soaring as much as 11pc in early trading, before falling back in early afternoon and closing up about 4pc.

The €180m property/leisure portfolio, made up of four Irish hotels and two Spanish resorts, has been a persistent drag on FBD's recent results, racking up impairments of more than €200m between 2008, 2009 and 2010. The new joint venture structure will "reduce our exposure to fluctuations in property valuations", FBD chief executive Andrew Langford stressed yesterday.

FBD had previously suggested any further property fluctuations would be upwards, telling investors write-offs already taken were sufficient to "draw a line under any residual doubts" about the value of the portfolio.

The comments, made in March, were borne out by yesterday's figures showing no property impairments were taken in the six months to June, despite a revaluation exercise.

Asked why FBD was limiting its exposure to fluctuations when future changes were more likely to be upwards than downwards, Mr Langford pointed out that the plc will retain a 50pc stake in the joint venture.

Strategic step

The plc boss also stressed that the deal was a "significant strategic step" that fulfiled the "over-riding imperative" of allowing management to focus more on the core insurance business and would reduce the plc's debt.

The terms of the deal involve Farmers Business Developments converting its €60m loan to the property/leisure business to a €52.5m convertible loan note and a €7.5m 'regular' loan to the joint venture.

FBD had guaranteed the entire €60m of the loan to property/leisure, but will now be guaranteeing just €7.5m of the new loans.

The plc will have further exposure to the new joint venture -- €62.6m of intercompany debt property/leisure owed to the plc will be converted into €62.6m of loan notes to the new joint venture. FBD and Farmers Business Development will initially each hold 50pc of the joint venture by subscribing for about €10,000 worth of shares apiece, and will both appoint three directors to the joint venture's board.

FBD's stake could ultimately fall to as little as 25pc, when both parties convert their loan notes into equity in five to 10 years' time.

As a "related-party transaction" the deal must go before shareholders of FBD and Farmers Business Development; extraordinary general meetings of both organisations are expected to be called shortly.

News of the proposed deal came as FBD reported a swing from pretax losses of €7.9m to profits of €20.6m and a 150pc surge in operating profits for the first half of the year. "We're very happy with the results," Mr Langford said, adding that the absence of catastrophic weather events was a "very large contributor" to the turnaround at the operating line.

FBD paid out €2.5m for weather-related events this January -- the Arctic conditions of early 2010 triggered costs of €12m. This year's operating profit rose €17.4m to €28.7m.

Mr Langford said FBD, along with other insurers, was also benefiting from "reduced frequency" of claims, as high petrol prices and the tough economy means the average driver spends less time on the road.

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