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Wednesday 18 July 2018

Darragh McCullough: Outcome of the Kerry battle will lay down a marker for other co-ops

Darragh McCullough on his farm in Stamullen, Co Meath. Photo: Gerry Mooney
Darragh McCullough on his farm in Stamullen, Co Meath. Photo: Gerry Mooney
Darragh McCullough

Darragh McCullough

Kerrymen are a very exercised bunch at the best of times, but there's a chunk of them down there that are fit to go into orbit at the moment.

And it's not over the exciting prospects for the latest crop of Kingdom footballers - it's more about whether their beloved Kerry Co-op can live to fight another day.

For those with only a passing interest, the current tensions centre on proposals from the co-op board to use its €2.2bn stake in the Kerry Group to reinvent the co-op as a trading entity again.

The tentative proposal is to buy back some or all of the agribusiness side of the massive Kerry Group Plc.

While this would return the co-op to its original function of servicing its farmer members, the problem for the co-op is that barely one third of the 13,500 shareholders have any involvement with farming.

The idea of investing the massive pile of cash carefully accumulated over the decades in a business that has low single-digit margins is laudable, but it just doesn't make a lot of sense when the shareholding continues to double in value every couple of years and churns out dividends on the back of Ireland's most successful food business ever.

The Kerrymen lucky enough to be part of this story from the start know that the gods were smiling on them the day they first invested.

They've pulled billions out of the brilliantly managed Kerry Plc over the years, and in the process set up subsequent generations in houses, education, and whatever career took their fancy.

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In some ways those co-op shareholders are victims of their own success. The funds that enabled the next ­generation to chose any career they wanted have resulted in a predominantly non-farming shareholder base.

Revenue cottoned on to this after the last spin-out in 2013. Up to that point, the co-op shareholders had benefited from an exemption on capital gains taxes by virtue of the fact that they were members of an agricultural co-op.

The letters that followed from the taxman scared the life out of all the Kerry Co-op shareholders. The issue was only let slide one last time by virtue of some legal heavyweights being rolled out to fight the co-op's corner.

However, reinvesting in low-margin agribusinesses isn't going to change the tax liability for the vast majority of Kerry Co-op shareholders.

This point was forcibly made at the co-op's packed AGM last month when shareholders called on the board to put in place plans to spin-out the rest of the 14pc holding in Kerry Plc to co-op shareholders.

'Misinformation'

Following this heated affair, the board is set to circulate a lengthy document to shareholders this week to counter the "significant misinformation" spread at the AGM that was causing "distress to shareholders".

What exactly this misinformation was is not specified. Instead, the letter states that shareholder demands for an effective liquidation of the co-op are not "as simple as many make it out to be".

"The objectives of Kerry Co-operative Creameries, agreed and signed-off on by the board in 2017, were that the co-op should continue as an entity, should be relevant to its members and should have liquidity in its shares," it states.

In the draft letter, the co-op's tax experts in Deloitte accountants outline ways of enabling the co-op shareholder base re-establish its agricultural credentials in the eyes of the Revenue.

A series of scenarios have been worked through, such as buying back all the C shareholders with less than 200 shares, the majority of whom are not still farming.

While this would bring up the percentage of members "mainly engaged in husbandry and deriving the principal part of their income from husbandry" to nearly 75pc, it would require a €158m raid on the co-op's funds.

This might make sense for the remaining 8,500 co-op shareholders to be able to dodge the bullet on tax liabilities for the bulk of the €2.2bn holding, even if they have to shell out a another €55m to cover the tax liability for C shareholders.

But it doesn't really deal with the main issue - that stated objective of Kerry co-op's board to be "relevant to its members".

Even after buying off nearly 5,000 C shareholders, the co-op would still have over 2,000 shareholders who do not rely on farming for a living.

While it might be entirely logical for farmers to keep investing in the security of their processing outlets and supply base, taking money out of businesses that have double digit profit margins to stick it into 2-4pc margin agribusinesses makes no sense for at least a quarter of the co-op.

Rather than ploughing funds into low-profit businesses in an effort to stay relevant, could the co-op not simply pay off everybody who wants out at the current market rate?

Mandate

It could fund this by selling off a chunk of its Plc shares, and then claim a credible mandate to reinvest in businesses to benefit its farmer base.

It would also address the issue that has been dodged by agricultural co-ops here for years - that of providing an attractive exit for shareholders when they are ready to call time on their farming careers.

As numbers shrink in farming, and farmers themselves look to retire out of farming, a credible buy-back scheme needs to become the norm.

This isn't just an issue for Kerry Co-op. Glanbia and other successful agri co-ops will encounter the same in time.

And in case we forget - relative to all the other challenges facing farming right now, this is the kind of headache with which we would all love to have to deal.

Darragh McCullough farms in Meath and presents the Ear to the Ground TV series on RTÉ

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