Darragh McCullough: Shareholders' anger as suitors line up to claim LacPatrick spoils
As the suitors line up to claim the spoils from LacPatrick, spare a thought for the farmer shareholders of the northern outfit.
In the same way that Dairygold suppliers were upset a decade ago, the men and women who built up the Town of Monaghan business that took over Ballyrashane Co-op three short years ago are understandably angry with the situation that they now face.
At the end of 2014, the accounts show Town of Monaghan Co-op had cash in hand and at the bank to the tune of €32m. The board had authorised a major expansion to the Northern Ireland drying plant but no contracts had been signed at that stage.
Within the space of a few months, the then new CEO Gabriel D'Arcy had made his first big move by 'merging' with the struggling Ballyrashane Co-op. With around 100 suppliers came a healthy 100 million litre milk pool.
And LacPatrick got to work revising plans for a 5t milk-drying plant at the Artigarvan plant, 20km south of Derry city into a 7t one complete with plenty of extras. It was delivered at a cost of over €40m.
Meanwhile, a number of experienced management exited the Town of Monaghan's HQ.
However, the lofty aspirations of the merger of the co-ops has turned decidedly sour for the new entity as the board recently decided to go to the market looking for a white knight from its erstwhile competititors.
As LacPatrick went out courting suitors for mergers, partnerships or other tie-ups, it stated it remained a profitable co-op and all farmers would continue to be paid on time "each and every" month regardless of how long the process takes.
After its latest milk price lagged behind the competition by over 10pc, a couple of dozen suppliers in the North sent in termination notices.
There are many questions now occupying the minds of all serious stakeholders. Equally, prospective suitors will have a string of questions including how much the co-op is worth.
Truth is nobody knows.
The latest annual accounts available from 2016 show it had an operating profit of €2.9m with a profit for the year of €298,487, while the 2017 accounts showing the latest cash in bank and debt are not yet available.
However, farmer shareholders will need to endorse any merger deal put in front of them with a massive 75pc vote. Just ask Glanbia how hard it is to achieve agreement.
So there will have to be a series of sweeteners included. A buyer will surely be able to justify another €10-€20m on the back of €40m-plus investment in new drying facilities in Artigarvan, along with the 20ac yoghurt, liquid milk and butter packaging facility at Monaghan town.
And that's before any value is put on the 600m-litre milk pool, and the branded businesses of Champion butter and milk, the deal with infant formula maker, Abbott, and the dried-milk business in west Africa.
Who will be interested?
There are four main players on the pitch.
Aurivo and Dale Farm have publicly stated their interest, and while Lakeland and Glanbia remain schtum, there can be no doubting that they are doing plenty of number crunching behind closed doors.
It's also likely that foreign companies will be interested. Fonterra has a long-stated goal of developing footholds in the European market.
The Chinese can't be discounted either given their already voracious and still growing appetite for the western diet. If it ticked all the boxes for a particular Asian entity, they would probably have deeper pockets than anybody.
But when all is said and done it's hard to see former Town of Monaghan and Ballyrashane shareholders voting for an overseas bid over a local outfit that they already know well.
Who will want it most?
Let's start with Aurivo. On the face of it, it may have the most cogent case for buying LacPatrick. Geographically, LacPatrick would be a good fit, working as a simple extension east of Aurivo's existing milk pool in Donegal.
In that regard, the Artigarvan plant is just over the border. But even more crucially, Aurivo is one of the few processors in the region that is facing an immediate requirement for extra milk processing capacity. While the plan was to build another drier at Ballaghadereen, a super modern plant at Artigarvan would be a ready-made solution. Between Aurivo's expected increase in milk and LacPatrick's 600m litres, the plant could be very close to capacity.
In addition, the amalgamation of LacPatrick's liquid milk and butter business would be a neat bolt-on for Aurivo which has worked hard at toughing it out in that space.
But there are potential downsides. Is it realistic to expect the entire LacPatrick milk-pool to move in unison with any deal? Some leakage, á la Glanbia's takeover of Wexford Creamery, is likely. But could it be more large-scale given the amount of switching that happens naturally in the North anyway? Maybe even more crucially, can Aurivo afford it? Aaron Forde has pulled off the merger with Donegal Creameries with some style, and wasn't shy about trumpeting the good news in its most recent set of accounts.
The business has an operating profit of €2.9m a year, according to the latest accounts. So it depends on if real money is required to change hands, and what can be accessed.
One thing Glanbia isn't short of is cash. As the largest milk processor on the island by some distance, and the owner of a number of highly profitable nutritional businesses, this is one suitor that could steam-roll everyone else out of the way.
It is also noteworthy that Glanbia is already effectively road-testing the practicality of processing milk through LacPatrick's new drier by virtue of the millions of litres that it has been pumping through Artigarvan since the start of April.
The relationship between the two processors also includes an arrangement where all of LacPatrick's one litre milk is packaged through Glanbia's Drogheda plant.
Glanbia has a Northern milk pool of 230m litres courtesy of its buy-out of Fivemiletown a few years ago. Currently much of that is trucked across the border into Glanbia's Virginia plant, which leaves that set-up quite vulnerable if a doomsday Brexit scenario materialises.
So a drier in the North would suit Glanbia quite nicely. In addition, the liquid milk, butter, yoghurt and infant milk formula ingredient operations in Monaghan would be easily subsumed into Glanbia's existing set-up.
However, the purchase is not without potential downsides. If Brexit doesn't pan out as badly as some say, would it make sense long-term for Glanbia to truck milk up past its Virginia plant to the very northern tip of its all-island milk pool to get it dried?
Dale Farm is another obvious suitor.
It is the only truly Northern Ireland processor that would have the fire-power to take on LacPatrick.
And don't under-estimate the ambition of the former Glanbia man now heading up Dale Farm.
Nick Whelan has only been in the gig for a few short years, and a move like this would represent the first big opportunity for the ambitious CEO to leave a legacy.
However, there are also downsides for a Northern processor taking on LacPatrick.
It is widely accepted that the North is effectively maxed out for milk expansion so Dale Farm would be reliant on others to max out the capacity in the Artigarvan plant.
That might be an uncomfortable position, especially if a hard border put the brakes on milk coming in from the South. Whelan could rely on spot market milk from Britain but shareholders might take a bit of convincing about the merits of that as a long-term investment strategy.
Last but certainly not least is Lakeland. CEO Michael Hanley has proved to be a shrewd operator in his expansion of Lakeland into the third largest processor on the island.
While LacPatrick invested serious time and money into winning over Ballyrashane, Hanley slipped Fane Valley out the side door. If the butter business at Fane Valley's site in Banbridge can be consolidated into the Monaghan plant, Hanley could capitalise on a very valuable site outside Banbridge.
Lakeland's other facilities both north and south of the Border would also be a nice geographical fit. But perhaps even more importantly, word on the ground among former Town of Monaghan suppliers is that they are already leaning towards Lakeland as their preferred suitor. That will carry a lot of weight when it comes to getting a deal across the line.
Could a break-up be on the cards? The thought of this will turn the stomachs of LacPatrick suppliers but it's quite possible that two co-ops may try to do a joint deal where the drier and a chunk of the pool is hived off to one processor, and another picks up the remainder.
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