Friday 28 July 2017

Glanbia sell-off is good news for investors but gloomy for Ireland Inc

Thomas Molloy

Thomas Molloy

THERE is something mildly dispiriting about Glanbia's plans to sell off its Irish operations and effectively become a Kilkenny-based holding company with several valuable US assets. Sharescope wonders how long that particular arrangement will last before the shares are listed in New York and the de facto headquarters moved across the Atlantic along with the senior executives tired of commuting and the grey weather.

Taken together with Greencore's recent decision to quit the Irish market to focus on the UK and US, those of us still intending to live here are almost inclined to ask the last public company to leave the country turn off the lights.

While the decision is depressing for Ireland Inc, it makes eminent sense for existing shareholders and offers an interesting opportunity to potential investors. If all goes to plan, Glanbia will soon be left holding a large US cheese and whey business and high margin ingredients and nutritionals business.

These have strong potential to deliver sustained double digit earnings growth, high and increasing return on capital and solid cash generation.

The sale will also significantly deleverage the company's balance sheet, while the removal of the large single shareholder will act like a shot in the arm for the share price.

The previous ownership structure, which saw the Co-op hold 54pc of the shares in Glanbia, created an overhang which has kept liquidity low and left a question mark over the shares.

That overhang will be effectively reduced to 17pc, which will be a strong catalyst for share rerating, according to recent calculations by Merrion Stockbrokers.

The deal has not been sealed yet and the eventual price to be paid for the Irish unit has not been agreed, but Glanbia chief executive John Moloney has a knack of getting what he wants.

The Waterford man has turned around the organisation by investing overseas, sold off low profit divisions, such as the company's Irish and UK pig meat factories, and tripled the share price in the process.

He seems bent on repeating the trick by selling off the low margin dairy division along with the chilled foods unit, property and various joint ventures.

The only major mistake Mr Moloney appears to have made was to hesitate before selling off Glanbia's vast tracts of land but he did manage to flog a fair amount of land before prices collapsed and the mistake is not as serious as some other plcs, such as Greencore and Irish Continental Group.

Most analysts say the loss-making dairy unit should sell for somewhere around €300m, or around €250m if one factors in the pension liability of around €56.7m.

Obviously there is a danger that the Co-op could get the units too cheaply, but Sharescope believes the price is not too important.

Companies need clear, simple narratives to sell their story and Glanbia's patter about an interesting suite of highly profitable food ingredients has been muddied by stories about farmers chaining themselves to the company's headquarters on Kilkenny's ring road while protesting against milk prices or the sale of small ironmonger stores around the South East.

Glanbia's chocolate clusters, which are used in muffins or whey-based foods for athletes, may not taste particularly pleasant, but the deal is likely to taste just right to investors who stand to benefit from the Co-op's wishful thinking about the future direction of milk prices here and their ability to withstand market forces.

Irish Independent

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