Darragh McCullough: Kerry Co-op farmers should cash in their chips

Darragh McCullough

Kerry shareholders got amazingly lucky in the ’70s… now the time is probably right to sell

Darragh McCullough

February 02 2021 02:30 AM

Oh to be a Kerry Co-op shareholder! Their biggest worry right now is how to divvy up the €2.5bn cash pile that has been accumulating under their backsides for nearly 50 years. Talk about jammy dodgers.

Kerry farmers, despite what they might have you believe, are no better than any other county out there.

They just got rotten lucky the day they hired a 28-year-old Denis Brosnan in 1972. The right man, in the right place, at the right time.

Golden goose: Kerry Plc has grown to the point where it now has 26,000 employees and is worth an astonishing €20bn

Over the subsequent five decades Kerry Plc has grown to the point where it now has 26,000 employees, is worth an astonishing €20bn and has created many millionaire shareholders out of the initial group of farmers who invested their pounds back in the ’70s.

Granted, it took a lot of hard graft, a laser-like focus and a lot of talented people to make this happen, and keep it churning billions with every passing year.

Darragh McCullough: Solar energy is a golden opportunity, but our farm leaders need to set the agenda

But I’m a firm believer that there’s always a huge element of luck involved with most success stories — and the bigger the success, the luckier they’ve often been.

The Kerry shareholders have now reached another Rubicon. Should they cash in more of their dwindling shares in the golden goose that is the Plc to take back control of a low-margin milk processing business for €800m?

It’ll all depend on who you talk to.

Industry observers reckon that a multiple of 10 times annual profits is saucy for a business with low profit margins. Reportedly, the business generates at least €80m annually from sales of €1.2bn, which equates to a respectable 6.5pc margin.

Relied on

But looking around at their equivalents in the sector, I wouldn’t be so sure that margin can be relied on for ever more.

It’s hard to keep perspective when your nose is to the grindstone 24-7, but dairy farmers need to be aware that the dairy sector has just come out of a golden decade.

There were a few nasty years in there — 2012 and 2016 in particular — but overall dairying has been remarkably resilient and its profits left every other farm enterprise for dead. So it’s only natural for the sector to feel confident.

It also helps when you’ve got a golden Plc goose out the back that has been laying eggs that have increased 400pc in value the last decade.

The €800m price-tag is justified by some who point that Friesland Campina and others are also interested in the business at that valuation.

But how realistic is it that the likes of Friesland Campina would really want to buy into a low-margin business where they have no current interests?

Darragh McCullough: A cheesy story with some hard lessons for the beef sector

Maybe they are keen on getting a slice of the Kerry milk-pool, but if they are prepared to pay a premium price for it, I’d be inclined to let them buy it.

Does it really make any difference to the Kerry milk supplier whether they are being paid by one multinational or another?

The fact is that the co-op is a bit of a nuisance for the Plc at this stage, and it would suit the CEO to be able to move the argumentative farmers a little closer to the exit.

And of course the farmers are mad keen to ‘regain control’ of the facilities that they rely on to process their milk.

They’ll be taking inspiration from their neighbours in the west Cork co-ops, who epitomise what happens when co-ops are well run.

But the Kerry lads shouldn’t lose sight of the fortunes of all the other dairy co-ops around the country that have been trying desperately to achieve the same result as the classy Carbery machine.

Maybe it’s a bit of luck, maybe it’s something else, but Dairygold, Glanbia, Lakeland, Aurivo and Arrabawn are proof that high milk prices don’t always go hand in hand with 100pc farmer control.

Of course the alternative that the Kerry co-op board continue to munch their way through €2m a year in fees and consultancy payments to look after €2.5bn is just as untenable.

And with Revenue threatening all kinds of punitive taxes for the two-thirds majority of Kerry Co-op shareholders who can no longer claim to have any farming activity, the pressure is on to make a move — any move.

At least the offer is relatively transparent. Looking back at the Glanbia deal of 2012, and I’m still not sure what the farmers actually paid for their slice of the agri-business.

But it looks like it was a far cry from the valuation on the Kerry equivalent. And there’s not many Glanbia suppliers that wouldn’t happily trade places with their Kerry counterparts.

So is this really the best use of all that Kerry Co-op money?