The key questions that Glanbia must answer

Shareholders still have nothing like enough information to make a rational decision on whether to back the proposals of Glanbia plc and Glanbia Co-op

The proposals from Glanbia plc and Glanbia Co-op deserve careful consideration given their importance and not just for milk suppliers in the Glanbia area, but all dairy farmers.

However, the amount of information made available does not allow for the depth and extent of the analysis and scrutiny so that farmers can take a rational and informed business decision. Analysis rather than spin is required -- not just a spin-out of plc shares.

It is stated that the proposal clarifies the ownership structure of critical assets for farmer members as far as the co-op is concerned. Likewise, with respect to the plc, it is claimed to that the proposals clarify the plc approach to Irish milk processing expansion. Whatever the proposals clarify, they most definitely do not clarify the relationships and obligations within the Glanbia Group. On the contrary, more critical and fundamental issues are raised than clarified.

From the co-op and its shareholders' perspective there are a number of key issues which must be addressed and answered.

OPTIONS

These issues fall into two broad areas. First, do farmers want to regain all or a shared control of the processing. If the answer is yes, then the next task is to ensure that what they're buying and what they're losing in terms of the future income from the holding in plc is objectively and fairly valued.

Farmers can't afford to ignore fundamental contradictions that ultimately will result in substantial losses and cost.

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Indeed it may not be popular to say, but the performance of Irish co-ops, with notable exceptions, has been chequered.

In the majority of cases survival was only possible by transferring the cost of poor performance on to suppliers by way of lower milk price.

Is it prudent from the co-op's perspective, given the huge investment that must take place to cater for the planned milk expansion post quota, that the plc will be exempt from any direct involvement and investment? Or that the financing cost is shifted on to the co-op and individual suppliers? This is a vital question which has to be answered.

In this regard it is odd to read the high octane description of the business prospects for the proposed joint venture company (Glanbia Ingredients Ireland or GII) as follows: "(GII will be a) strong and profitable business .. exporting to over 50 countries worldwide across multiple market sectors... strong complementary links with the plc will continue".

If this is the case, why is the plc turning its back on such a desirable business opportunity? One would expect the plc would wish to get involved in this strong and profitable business, rather than the opposite.

So should the co-op get involved in a milk processing joint venture or stay with the current structure it has put in place and financed?

This is the critical question; but without full details, it not possible to arrive at a definitive answer. For example, farmers will want to know what will be the proposed relationship between the joint venture (GII) and the plc.

Also, it is proposed that there will be detailed contractual obligations on milk suppliers to GII, but will there be any contractual obligations between GII and the plc with regard to marketing, or will GII depend on the efforts of the Irish Dairy Board (IDB) for marketing?

The relationship with IDB and the Glanbia "family" is anything but clear. This has been a long-standing unresolved issue which is neither sustainable nor desirable.

Regardless of the decision of the shareholders on the proposals now being put to them, clarity is essential not just for Glanbia suppliers, but for all suppliers across the country who depend on the success of IDB to market their product.

I note that listed among the assets to be transferred to GII is the 23pc 'Glanbia' shareholding in the IDB. What is meant by Glanbia in this context?

It is my understanding, based on the published 2012 annual report of IDB, that the representatives from Glanbia on the board of IDB are representatives of Glanbia Co-op. However, based on the proposals now before Glanbia Co-op members, Glanbia's IDB shareholding will now be vested with the joint venture entity GII.

This means farmers in Glanbia would decide that 40pc of the Glanbia shareholding in IDB will be owned by the plc given that the plc owns 40pc of GII.

This it is a rather important development and one every dairy farmer, whose income is determined by the marketing activities of IDB, clearly has an interest in.

Who will represent GII on the board of IDB is another critical issue, particularly if there are no long-term contractual marketing arrangements between GII and Glanbia Plc?

It is stated the plc will have a proportional 40pc representation on the board of GII. Is the plc to be relieved of any direct responsibility to fund expansion of the necessary milk processing but to retain a significant influence on the board of GII?

Contrary to the upbeat comments in the proposals, which put turnover in GII at €740m and profits before interest, tax and depreciation at €44m, the reality is that this is not a very exciting business.

Perhaps this is one reason, if not the main reason, why the plc wants out of Irish milk processing. The data on the possible projected investment requirement by GII into the future is rather scant.

Farmer suppliers will have to make direct financial contribution to future capital needs at the rate of 2c/l.

Furthermore, it is stated that the GII will retain 1c/l as profit, but it is not clear whether or not this 1c/l retention is inclusive or exclusive of a competitive milk price relative to that paid to by other milk processors.

This current set of proposals from Glanbia Plc is a stripped-down version of the 2010 proposals rejected by shareholders.

The essences of these proposals, rather than clarifying the relationship within the Glanbia "family", will add another layer of complexity.

Severing milk processing from the agri-business section is not wise. I have tried to raise a number of key questions on these important proposals.

The interpretation of the content of this article should not be that the latest Glanbia proposals are a bad deal for farmers. The only purpose is to identify issues to which shareholders are entitled to answers.

Indo Farming


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