Geest plc has announced that an agreement has now been reached to create a new business called International Produce Limited (IP), which is launched today.
The purpose of the business is to simplify the supply chain for imported produce to Asda Wal*Mart (Asda). International Produce combines the current import activity of Geest’s English Village Salads (EVS) - a business dedicated to Asda - and the business of Thames Fruit Ltd (Thames) - an exclusive importer of citrus fruits and melons for Asda. IP intends to expand its product portfolio to handle other types of imported produce. International Produce will operate from two sites in Yorkshire and Kent. EVS will continue to supply Asda separately with produce grown in the UK.
Geest has contributed cash of £76,000 and the Teresa family (the owner of Thames) £24,000 as the initial equity in IP. The family’s shareholdings in International Produce will reflect these contributions. IP will purchase approximately £1 million of fixed assets from Thames. The net asset value of International Produce is £0.1m at today’s date.
Based on plans for the first six months of trading, IP is expected to report an estimated annualised profit before tax of £1.7m.
EVS’s profit will reduce as a result of the transfer of business to IP but the expected overall impact of the transaction on Geest in 2004 is a small increase in earnings. As a result of the revised supply contract with Asda, Geest will now account for both IP and EVS - for the supply of produce - as if they were agents.
In the second half of 2004, Geest expects to record aggregate sales of about £18.5m for EVS and IP under this new accounting treatment. Had Geest reported EVS’s sales in this way in 2003, they would have been reduced from approximately £127m to £16m. Geest has granted Asda an option over its shares in IP in consideration for a payment of £5.3m in cash over the next five years. After that period, if the option were exercised, those shares would be valued at net asset value and the consideration for the shares would be paid in cash on completion.
Although net asset value is capped at £80 million, if this transaction were to occur, the expected net asset value is likely to be far lower.
Gareth Voyle, chief executive officer of Geest plc, said: “I welcome this business venture which preserves and develops our existing business with Asda and improves the efficiency of its supply chain. This is a good example of the way in which value can be generated, both for the customer and for our shareholders.”
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