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Sunday 19 August 2018

Clash looming at Kerry Co-op over core €2.2bn stake

File photo
File photo

Serious differences regarding the future direction of Kerry Co-op are expected to come to a head at the society's AGM tomorrow.

While the leadership of Kerry Co-op board is exploring the option of resurrecting the co-operative as a trading entity with milk processing, a proportion of shareholders want the society to spin-out its valuable remaining stake in Kerry Group Plc.

Kerry Co-op is the largest shareholder in Kerry Group Plc with a 13.7pc holding valued at €2.2bn, although the co-op's stake in the plc has been gradually diluted over the years.

The co-op has reduced its shareholding in the dairy and ingredients company in seven separate share spin-outs since 1993, the last of which was in 2013.

A cohort of co-op shareholders now want Kerry Co-op to sell its remaining stake in Kerry Group Plc and share the dividends among the society's more than 13,000 members. This would result in an average pay-out of around €165,000 per co-op shareholder.

However, it would be worth much more to those with significant co-op shareholdings since one Kerry Co-op share is nominally valued at 6.12 Kerry Group Plc shares. That puts the value of each Kerry Co-op share at €550, given that Kerry Group Plc shares are trading at €90 per share.

The spin-out option is opposed by the leadership of Kerry Co-op, who argue that such a move may not benefit from favourable tax exemptions that applied in the past.

The 701 clause in the Finance Act essentially enabled co-op members to receive plc shares in a spin-out situation without incurring an immediate tax liability. Tax on the share transfer was delayed until the shares were sold. This concession has been the subject of a Revenue review in recent years.

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But the implications of this review are a matter of contention between leading members of the Kerry Co-op board and their critics.

Moreover, moves by the Kerry Co-op board towards re-establishing the entity as a trading business have raised concerns among some shareholders.

Currently, the co-op represents farmer members who supply milk and trade with Kerry Group Plc, but the company owns and operates the milk processing and manufacturing divisions, as well as the agri-trading business.

However, a draft letter to shareholders from Kerry Co-op states that it needs to "evolve into a trading agricultural co-operative with milk processing facilities".

The letter, which has been seen by the Farming Independent, follows a study by the co-op's strategy committee.

Possible actions identified include the acquisition of the Kerry Agri-Business arm of Kerry Group - the stores network and feed mills - if such a venture made "commercial sense".

In terms of milk processing, it recommends that "all options to work with a co-operative or milk processing company through a merger/joint venture or other suitable structures" should be explored.

Milk processing

Shareholders are requested to submit their preference on how Kerry Co-op should proceed by Friday, August 3.

While a source close to the Kerry Co-op board would not comment on the references to milk processing, he pointed out that the option to purchase Kerry Group's agri-trading division was in place since 1996.

"The board has no choice but to look at this option," he said.

He further claimed that criticism of the Kerry Co-op board was being driven by "half a dozen people".

However, the board's detractors claimed that the Kerry Co-op is using the €2.2bn shareholding in Kerry Group Plc to effectively back a trading venture in what they claimed were "low-margin businesses".

They also accused the Kerry Co-op board of attempting to downgrade a sizeable proportion of the society's 3,300 B shareholders - former milk suppliers to Kerry Group - to non-voting C shareholder status by way of a motion at tomorrow's AGM.

However, a source close to the Kerry Co-op board said this motion was "not in play" and that a senior executive from ICOS will be on hand at tomorrow's AGM to "clarify the matter" and to explain "how any misunderstandings arose".

Co-op could make bid for agribusiness division

A number of scenarios are outlined in the Kerry Co-op  draft letter to shareholders regarding the possible purchase of Kerry Group’s agribusiness division.

The letter indicates that Kerry Co-op may seek to purchase the division during 2019 if the venture made “commercial sense”.

It also states that the Kerry Co-op has an option to buy the agri-trading division should Kerry Group “propose to sell a material part of the asset”.

The trading division is listed as including “assembly, agri-trading, cattle breeding and provender milling”.

The valuation date for the business would be

“180 days from date of final notice to exercise the option”.

If parties fail to agree a sale price, an independent valuer will calculate the open market value of option assets.  In relation to milk processing, the letter states Kerry Co-op aims to explore all options to work with a co-operative or milk processing company through a merger/joint venture or other suitable structures.

An appendix to the letter notes that further consolidation in the Irish milk processing sector is likely over the coming years.

Should Kerry Co-op agree to purchase the Kerry Group milk assembly business then the plc would have to agree to buy, at prices agreed under the milk supply agreement, no less than 85pc of the milk pool from Kerry Co-op for a period of at least seven years from the date of purchase of the agribusiness.

In return, Kerry Co-op would agree to sell to Kerry Group Plc 85pc of the milk pool for seven years.

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