Friday 24 January 2020

Glanbia milk suppliers tortured by complexity of deal

Ireland's biggest dairy processor is five days away from D-day. Next Tuesday, Glanbia co-op shareholders will vote on the proposal to reduce their shareholding in the €2.2bn plc in return for an option to take the company's Irish dairy processing plants back under farmer control.

It's a big deal not just for the farmers involved, but potentially, the entire dairy industry and possibly the Irish corporate landscape.

The farmers are being offered a 60pc stake in the existing facilities at Ballyragget, Virginia and Corman Miloko in return for selling off 3pc of their massive €1.2bn stake in Glanbia plc.

The facilities come with the promise that the new joint venture (JV), free of obligations to other shareholders, will be able to pay farmers more for their milk.

A second proposal gives the co-op the chance to set up the new joint venture virtually debt free by reducing their plc shareholding by another 10pc. This latter option includes an additional carrot of a share spin-out worth nearly €10,000 per farmer.

Further down the road, some dairy sector leaders believe that the joint venture will open up more possibilities for co-operation, and hence rationalisation of processing sites, with other dairy co-ops.

So what's not to like?

Well, the truth is that many of Glanbia's 4,500 milk suppliers are tortured by this proposal, and not just because of its inherent complexity.

The biggest stumbling block is the concept that the farmer-owned co-op is being asked to cash in 22pc of its stake in one of corporate Ireland's star performers with profit margins of 7pc across all its operations.

In return, the co-op will get a 6pc higher stake (remember, they currently own 54pc of the plc) in all of the plc's lowest margin operations. The milk processing facilities currently return about 2pc annually.

Why, many veterans of painful Avonmore and Waterford mergers ask, should we give up our share of highly profitable businesses that we worked so hard to fund and establish?

But the truth is that the baby birthed by the flotation of the merged co-ops back in the Nineties has out-grown the cot.

The management of Glanbia plc under the watchful eye of the big Kilkenny man, John Maloney, has been hugely successful in its overseas investments.

In an era when milk output in the EU was capped by milk quotas, the burgeoning plc looked to growth markets in the US and beyond to set up world-class factories and research centres.

The company now has a secure foothold in some of the fastest growing food markets. Sales of its sports nutrition drinks and powders in the US are reported to be growing at a rate of 12pc in the last year, despite the on-going recession.

The company's share price, after a couple of nervous years in the early days has soared from below 60c to close to €7.70 today. It has more than doubled in the last two years alone.

The stellar performance has continued despite the huge 54pc block that the co-op has continued to hold in the company. Ownership of that big a share by any single entity is normally seen as a big impediment for institutional investors and pension funds to buy.

Presumably, Mr Maloney and his team see it that way too. Letting the co-op decide what price it pays its suppliers for milk has the added bonus of side-stepping all that continual grumbling from farmers about the plc's milk price.

It's next to impossible to call the vote next week, given that a similar proposal failed two years ago.

But if this is the start of the long goodbye for Glanbia plc from its farming roots and Irish operations, is there a possibility that it becomes a sitting duck for a take-over by a bigger international corporation?

At today's values, that would be a big pay-day for shareholders, but a bigger loss for Ireland Inc.

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