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Sunday 23 July 2017

Analysis: Will pressure from shareholders spell the end of Kerry Co-op?

Kerry Group chief executive Stan McCarthy stepped down from his role as chief executive of the farmers' body, Kerry Co-op.
Darragh McCullough

Darragh McCullough

What do Kerry Co-op share-holders really want?

That's the question that should be top of the agenda at today's AGM of the country's richest co-op.

The 13,500 shareholders are sitting on top of a 13.7pc Co-op stake of around 24 million shares worth nearly €2bn in Ireland's most successful food company, Kerry PLC.

But whether the 28-man co-op board led by Mundy Hayes has any appetite to get stuck into the real elephant in the room is another question.

The board is currently motoring along without a CEO after Stan McCarthy announced he was stepping down from the Kerry Co-op as a row over the milk price rumbled on. The months have also rumbled by but so far no one has been hired.

The long-running arbitration that was started nearly a year ago to sort out whether Kerry was sticking to its promise to pay a "leading milk price" looks like it won't have anything to report until the autumn. That's a long time to wait for your final milk cheque for 2015.

I hear that a "very generous" offer north of 1c/litre has been put forward as a 13th payment for 2016 but that too is in danger of heading for arbitration if the board fails to settle before the end of the month.

All the while, the co-op's running costs have doubled to close on €1.4m.


At least €450,000 of that goes to the co-op board in fees.

Presumably a good chunk of the rest is accounted for by the sudden interest that Revenue took in the southwest's most prolific cash cow.

Test cases between shareholders and the Revenue over how the capital gains from their co-op shares should be treated are already in train, and could go on for years.

Much centres on the deal that the original Kerry supremo, Denis Brosnan, did with Revenue many moons ago that affords special treatment for agricultural co-ops in the form of the 701 tax cert.

In some ways, Kerry Co-op shareholders can afford to be blasé - they've €12m in annual dividends pouring in the door every year from their massive PLC shareholding.

Following the recent move by Glanbia Co-op to buy back a share of its dairy and agribusiness, many are talking about how the Kerry Co-op warehouses the shares, while the PLC owns the processing facilities, farm stores and milling facilities.

Sure, the co-op 'negotiates' with the PLC on milk price, but are they really able to extract any more from the commercial entity that is the PLC than would a well-organised producer group?

All the while, shareholders' assets are locked up in a Co-op that doles out goodies every couple of years. What the increasingly restless shareholders in Kerry Co-op might be interested to learn is that the board already has discussed the best way for shareholders to cash in their chips without incurring punitive 33pc capital gains taxes.

Options

Lo and behold, one of the options discussed that might be the best way to keep the Revenue happy is to convert all the Co-op shares at once to PLC shares. But this would be the end of the Co-op.

Of course, turkeys don't vote for Christmas, and the Kerry Co-op board has been particularly hostile to any commentary on this subject in farming and media circles in recent months.

There hasn't been much direction coming from the farm organisations on this issue either.

Instead, the notion of reinvesting the co-op's wealth to relive its glory days when it had active roles in local businesses is doing the rounds.

The reality for many current co-op shareholders is likely to be very different. The vast majority don't milk cows, most probably don't even farm, and many don't live anywhere near the Kingdom.

They see their shareholdings as gold-plated assets that have grown in value beyond their parents' wildest dreams. These shares are not to be put on the line for some business play or attempt to reinvigorate the original Co-op.

In the same way that land is often a sacred investment for farmers, Kerry shareholdings, whether in the PLC or co-op, are considered family silver, never to be parted with unless in times of dire need.

At the same time, shareholders want to be able to make their own call as to when that need to sell arises.

This non-farming majority feel they are not represented by the co-op board, who are all farmers in their own right. In fact, the 'dry shareholders' - those with the B and C shares - rarely have even a vote.

One young ardent Kerry supplier who got in touch was adamant they are in "last chance saloon" territory in terms of getting their €2bn worth of shares converted, and wants the money to invest in the farm.

The views of dry shareholders may also be merging with those of active suppliers, who for one reason or another could do with the freedom to cash in some or all of their shares at different times.

A 100-cow farmer could easily have €100,000 if the shares were converted into PLC equivalents.

In fact, many's a 60-cow Kerry farmer has passed on one or two million euro in Kerry shares amassed over the years.

It's time to let their lucky descendants choose how to use their spoils.


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