Devil in the detail for long-awaited Glanbia sale
THE only surprise about the mooted sale of Glanbia's Irish business to the group's co-op shareholders is that it has taken so long to come about.
Analysts and institutional investors alike have long criticised the earnings drag that Dairy Ireland in particular inflicted on the overall Glanbia group, which has increasingly diversified into new-fangled areas like advanced nutrition and American cheese.
The troubled local division had operating margins of just 2.3pc last year compared to 11.4pc in the buoyant overseas business. And that unfavourable comparison doesn't include the €15m of restructuring costs booked on behalf of Glanbia Ireland.
The Irish division also gobbled up working capital at a rate far in excess of the more profitable US Cheese and Nutritional division, a fact freely acknowledged yesterday by Glanbia plc boss John Moloney.
And to complete the dysfunctional triangle, having a farming co-op as a 54pc shareholder left Glanbia in an unenviable position of propping up the price it paid to farmers for their milk when world dairy markets tanked last year.
As Moloney summed up succinctly at yesterday's briefings: "The plc shareholders are fundamentally interested in a sustainable growth model. . . (this deal) would enhance our ability to do that."
The strategic wisdom of the transaction was accepted by analysts across the board yesterday, though valuations and the orderly wind-down of the co-ops 54pc stake in Glanbia plc will be of crucial importance to the deal's status as a value-builder.
While the value of the Irish assets is currently placed at between €255m and €280m, this is based on 2009 figures which saw the world dairy prices collapse. It is understood the final figure could be somewhat higher.
The proposed deal is touted as a win-win for both the farmers and the plc, but like all deals of this calibre; the devil will be in the detail.
Some industry sources believe the co-op, which has no debt, would want to be getting the business on the cheap for the deal to make sense. "You can get something for nothing and still make a loss," one source said.
Having propped up the milk price it paid to its farmers last year, the plc appears to have had enough of volatile milk prices and disgruntled farmers and is now running scared of the EU reforms that will see milk quotas abolished in coming years and ultimately will lead to further fluctuations in milk prices.
But the reality is that the co-op supported the plc for decades when it went out on a series of expensive expeditions to the US and blew millions. The plc was also happy to stay in the milk business when the EU was paying subsidies directly to the processors but this payment has now switched from the processor to the farmer. Times are tough in both on national and world dairy markets and the plc is happy to opt out.
There is a view within the industry that the plc model failed to offer the necessary flexibility to deal with increasingly volatile milk prices for farmers. This resulted in huge tensions between farmer shareholders and the plc.
In turn there was unease amongst institutional shareholders that farmers had undue influence at board level.
This was highlighted by last summer's angry farmer protests which targeted plc events.
Having started out as small -scale farmer co-ops and drifted through amalgamation and purchase to adopt a plc mantle, it is somewhat ironic that the requirements of the modern dairy sector sees the industry return to its co-op origins.