Grappling with the maths on base cost of Fyffes shares

I have some shares in Fyffes. I don’t understand what part Blackrock and Total Produce play in Fyffes. Can you please explain?

If I were to sell my shares in Fyffes, would Blackrock and Total Produce be involved and to what extent?

Mr AR, Dublin

There’s nothing like the division of a listed company to give shareholders a headache. Having said that, I am a little surprised that the Fyffes deals have not come up before, given that the transactions happened in 2006. I would have thought that it would have have emerged as an issue for shareholders before now.

You basically need to work out if you have made a capital gain when you eventually sell your Fyffes shares.

Making that calculation when the shares you now hold relate to a very different corporate structure to the one in which you initially invested is not straightforward.

However, the good news is that the Revenue Commissioners, aware of the endless possibilities for confusion, tend to set down guidance on how to adjust the original share price to account for such splits and demergers – and that’s precisely what they have done here.

Starting at the top, where you initially bought shares in Fyffes, you now own shares in three separate companies: Fyffes, Blackrock International and Total Produce.

You don’t provide details on your shareholding or the price at which you bought it, but essentially, if you had 100 shares in Fyffes, you still have 100 shares in the company – although it is clearly a very different animal now. You also have 100 shares in each of Blackrock and Total Produce.

To sort out what the "base cost" of each now is, you will need to know what you originally paid for the shares. The base cost is Revenue's assessment of what portion of each original Fyffes share is accounted for by the three new entities.

You will need to work this out in two stages.

First, you need to assess how the spin-off of the Blackrock International Land business affected the base cost of your Fyffes stock – and established a base cost for the “free” shares you got in Blackrock.

The Revenue determined that the market value of each company after the merger was Fyffes (€1.47 per share) and Blackrock International Land (€43 cent per share).

These figures allow you to determine how much of your original purchase cost is made up of the Fyffes shares.

Take the original price you paid for the shares – for this example I will use a price of €2 but you can substitute your own figure – and multiply this by the post-split market price for Fyffes of €1.47. Then divide that sum by €1.47 + €0.43 (the respective market values of shares in the two companies), which is €1.90. The formula will look something like this: €2 x €1.47/(€1.47 + €0.43).

That gives you a figure of €1.547368 . . . which the Revenue rounds up to €1.55.

So Revenue calculates that if your original shares were bought for €2, the new Fyffes shares after the Blackrock split had a “base cost” of €1.55 and the Blackrock shares had a “base cost” of 45 cent.

If you sold the shares at that time, you would have subtracted €1.55 from each Fyffes sale price to work out your capital gain per share, and similarly with Blackrock.

As I don’t know your figure, an easier way of remembering the base cost is that it amounts to 77 per cent of the original purchase price of the Fyffes shares, while Blackrock shares’ base cost is equal to 23 per cent of the original price paid for the Fyffes stock.

But it doesn’t end there, of course, because Fyffes subsequently spun off Total Produce.

After the Total Produce deal, Revenue determined the market price of the shares as 96 cent (Fyffes) and 79 cent (Total Produce).

Remember that, following the Blackrock deal, Revenue is assuming your Fyffes shares have a base cost of €1.55 (assuming you paid €2 for them in the first place).

To calculate the final base cost for Fyffes and the new base cost for Total Produce, take your €1.55, multiply it by 96 (the market value of the Fyffes stock following the deal), and divide that sum by 96 + 79 (which is €1.75), the value in cent of each of the two shares. It will look like this: €1.55 x €0.96/(€0.96 + €0.79) and the outcome will be €0.8502857, which Revenue rounds down to 85 cent.

That makes the base cost of Total Produce €1.55 – €0.85, which is 70 cent per share.

Again, it might be easier to use percentages so that you can work it out on the basis of the price you actually paid for Fyffes originally. Remember that before the Fyffes/Total Produce deal, the Fyffes shares were worth just 77 per cent of their original purchase price.

At a base cost of 85 cent, the rump Fyffes stock is worth 55 per cent of the deal with Total Produce. But that is effectively 55 per cent of 77 per cent, so in terms of calculating how much of the original Fyffes purchase price is allocated to the rump Fyffes stock, the correct percentage is 42.35 per cent.

The equivalent figure for Total Produce is 34.65 per cent.

With that information, you go back to the price you paid at the outset when you invested in Fyffes and you divide it as follows: 42.35 per cent of that original value is now the “base cost” of the company still called Fyffes at the end of the two splits; 34.65 per cent is the base cost of Total Produce; and 23 per cent is the base cost of Blackrock International Land.

When you have worked that out, you will subtract that figure from the sale price per share when you sell your Fyffes shares to work out your capital gain.

Also, as I mentioned, you now have shares in Total Produce and Blackrock. When you sell those, you follow the same procedure to calculate your capital gain on those transactions.

Remember, you are entitled to make a capital gain of up to €1,270 in any year before facing a bill for capital gains tax.

Finally if, having worked out the figures, you are actually making a loss on any share sale, you can offset it against future profitable sales in the same year and if it is not fully offset in that year, you can carry the loss forward.

Good luck with the maths. If you send me in the purchase price, I’ll crunch the numbers for you.

Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara St, D2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.