Farmers' co-operation is Holy Grail for Glanbia
The food conglomerate wants to divest itself of its milk processing business, but not all dairy producers are on board, says Peter Flanagan
THE Glanbia press event was unusual to say the least. The company had that morning announced stellar half-year results but, more importantly, plans to spin out their milk processing business into a joint venture with Glanbia co-op.
Glanbia's press briefings are normally straightforward affairs. Chief executive John Moloney and chairman Liam Herlihy sit at the top table and take any questions from the awaiting hacks.
This one was different though. There was an edge to proceedings. Mr Moloney was on his own, and Mr Herlihy had been "delayed" at a meeting of the co-op council in Kilkenny. Eventually he arrived 45 minutes into the briefing.
The chairman was held up because the council meeting had not gone according to plan.
Two years after a move to demerge Glanbia's milk business from the rest of the company narrowly failed, farmer shareholders are deeply suspicious of what the company is trying to do this time around, and they vented their feelings at Mr Herlihy.
Are they right to be angry and suspicious? Or is this a deal that will finally work for both sides of the company?
The joint venture is a complex one to say the least.
Glanbia Plc is made up of two main divisions. On the one hand there is the Dairy Ireland division. This is made up of the company's milk processing business, consumer goods (such as Avonmore milk), and agri-trading. On the other side is US cheese and global nutritionals. While both divisions are profitable, the big money is made on the global nutritionals side of the house.
Glanbia's US cheese and global nutritionals business supplies the likes of whey protein and other diet supplements to shops such as Holland & Barrett. The growth in that sector can't be overstated, and Glanbia has spent hundreds of millions of dollars on products such as Optimum Nutrition and BSN in the United States. Both have a stable of athletes on their books, from NBA stars to rugby internationals like Rob Kearney.
Last year the US cheese and nutritionals operating profits grew 17pc to €122.2m on turnover of €1.32bn. Compare that to the Dairy Ireland's profits of only €57.9m on turnover of €1.35bn. Crucially, Glanbia Plc is making more than twice as big a margin in nutritionals as it is in Dairy Ireland.
Clearly the growth for the company is in the nutritionals side. Naturally enough, that is where Mr Moloney wants to focus his attention.
There is a catch, however. Glanbia Plc -- the company that is quoted on the Irish Stock Exchange -- is 54pc owned by Glanbia Co-op. In effect, the farmer shareholders who supply milk to the Plc control a business that has now grown far beyond the dairy co-ops it was born out of.
That is bad enough for the Plc, but in 2015 the EU will remove quotas on milk production for the first time in 30 years. Naturally enough, dairy farmers are eagerly awaiting their first chance in a generation to increase their milk production. Glanbia's own surveys show their suppliers plan to produce as much as 60pc more milk than they do now.
Dealing with all that extra milk takes time and money, while the Plc would understandably focus its attention elsewhere. This is where the joint venture, called Glanbia Ingredients Ireland (GII), comes in.
Under the plan announced last August, the co-op will control 60pc of the GII joint venture, with the remainder of the new company being owned by the Plc.
GII will then take on all of Glanbia's milk processing business, including the operations at Ballyraggat in Co Kilkenny and a new plant to be built at Belview Port on the Kilkenny-Waterford border.
The company will be led by Jim Bergin, the current head of Dairy Ireland.
The co-op will pay €44.2m initially for its share of the new company but that could rise to between €60m and €70m depending on working capital requirements.
To finance the deal, the co-op plans to sell 13pc of its 54pc holding in the Plc. If its farmer shareholders approve the deal, the co-op will sell 3pc of its holding to pay for the 60pc stake in the new company. It will then transfer 7pc of its shares directly to its farmers, while another 3pc will be liquidated and the proceeds put into the joint venture.
The co-op shareholders will receive 3.3 Plc shares per co-op share they own worth an average of between €7,000 and €8,000 per head from the spin- off if it goes through.
The logic for the deal from the Plc's side is clear, as it allows it to focus entirely on growing the nutritionals business.
For the farmer shareholders, they get full control over their milk production at last, and they get a market for the extra capacity they will bring on stream in three years' time. The spin-off they receive from the co-op-Plc share swap will also help them invest in their farms and increase milk production.
Once the deal closes, the co-op will also have an option to buy the Plc's 40pc share in the joint venture over the next six years. The Plc will not have the equivalent right.
Such a move would then bring Glanbia's milk production entirely under the co-op business model. That is seen as crucial for future consolidation in the sector.
Glanbia is known to have held talks with Dairygold about combining their milk processing businesses but that plan fell apart because Dairygold boss Jim Woulfe apparently felt the Plc model of Glanbia and his co-op model was not compatible. With the joint venture, that obstacle would be removed.
For the joint venture to proceed, 50.1pc of 8,000 co-op shareholders will have to back it when it goes to a vote. After that, 75pc of co-op shareholders will have to pass two votes allowing the co-op to drop its stake in the Plc below 50pc.
Financial analysts have welcomed the proposal. The IFA president John Bryan did too, calling it "ambitious and balanced". The "Farmers Journal" also welcomed it. So all in all it would seem a good deal.
Why then are so many of the farmers up in arms over the proposal? Four of the co-op's 14 board members voted against the proposal, and the various co-op meetings that have taken place around the southeast since August have been notable for the distrust many farmers have of Glanbia.
The reasons for this distrust, justified or not, are numerous.
There is the natural suspicion that if a company wants to sell you something, and they are happy to be rid of it, then you must be losing somehow. There is also lingering distrust of a company many have spent years battling over milk prices.
There are bigger issues, however. The aborted attempt two years ago to demerge the Dairy Ireland business back to the co-op barely missed out on the 75pc approval it needed and that campaign left a bitter taste in many farmers' mouths. For many, emotions are still raw after that period.
The "dissidents" have four main concerns.
Some are concerned this will be the beginning of the end for their investment in the Plc. If the JV needs more capital, then the easiest way to finance it would be to sell Plc shares, beyond the 13pc already earmarked for sale. The projected indebtedness of the new company -- peaking at €170m in 2015 and then falling -- is also a worry.
Most importantly, opponents of the deal are asking why they should give up their holding in a group that has been a licence to print money in recent years.
Since the last vote, Glanbia's share price has more than doubled, broadly on the back of the US Cheese and Global Nutritionals business which is continuing to grow.
The co-op receives a dividend of between €12m and €13m annually from the Plc as things stand. If its holding is diluted then it stands to reason that valuable dividend will be reduced also.
They also worry that the new company will ultimately have to take on the consumer goods business and the agri-trading side as well. The consumer goods is seen by analysts as a particularly undesirable business given the current economic climate.
There are counter arguments of course. The dividend may be reduced in the short term but if the Plc side of the business is allowed to grow, the dividend will increase again. The farmers should make more money anyway by increasing production and gaining extra control over how their milk is handled.
Even with the reservations, a 'Yes' seems likely when the co-op votes on the joint venture.
"The sense is that in 2010 the farmers really dodged a bullet by voting 'No' to the demerger," said one Glanbia watcher.
"The circumstances are very different this time around though. Times are harder for farmers, and getting Plc shares into their hands worth thousands of euro will be difficult to turn down.
"The dry (non-producing) co-op shareholders have no skin in the game so they'll happily take the money and, because of how the deal is structured, it only needs a simple majority this time around. I would be very surprised if the JV at least isn't passed," he added.
Glanbia is distributing an information booklet to its farmers next week and the joint venture vote is expected in November with the "A" and "B" votes on the Plc holding expected before the end of the year.
If the first vote goes through, then the A and B votes are considered a fait accompli.
It's taken two-and-a-half years longer than expected, but Glanbia may soon have dispensed of the milk business it came from.