Tuesday 20 March 2018

Food for thought at Kerry as Glanbia targets high-performance future

Glanbia's restructuring of its Irish business, which hives off its lower-margin legacy operations into a separate company controlled by its co-op, increases the pressure on Kerry Group to do the same, writes Dan White

Siobhan Talbot, managing director of Glanbia, is overseeing a major change at the Irish plc. Photo: Bloomberg
Siobhan Talbot, managing director of Glanbia, is overseeing a major change at the Irish plc. Photo: Bloomberg
Dan White

Dan White

Both of the major quoted Irish dairy processors, Glanbia and Kerry, reported their 2016 results last week. The highlight of the Kerry results was a 7pc increase in earnings (after-tax profits) per share and the retirement of Stan McCarthy, chief executive for the past decade, and his replacement by Edmond Scanlon, previously the head of Kerry's Asia/Pacific operations.

Far more dramatic was the news from Glanbia. Not only did it deliver an 11pc increase in earnings, it also announced a dramatic restructuring, selling a 60pc stake in its Dairy Ireland business to Glanbia Co-op for €112m.

The sale of a controlling stake in Dairy Ireland - which consists of Glanbia's Irish-branded dairy operations and its agribusiness arm - continues the transformation that started with the sale of 60pc of Glanbia's Irish dairy-processing business, Glanbia Ingredients, to the co-op in 2012. Glanbia Ingredients will now be subsumed into Dairy Ireland.

The co-op is funding the deal by selling a chunk of its Glanbia shares, in a move that will reduce its stake from 36.5pc to 33.5pc. In addition it is "spinning out" a further 2pc of the shares to its members, leaving the co-op with a 31.5pc Glanbia shareholding. The spin-out will be worth an average of €10,800 for each Glanbia Co-op shareholder who is also a milk supplier and about €6,600 each for co-op shareholders who aren't milk suppliers.

So why is Glanbia doing the splits? Look at the numbers. The core of the new Glanbia are now its Performance Nutrition and Nutritionals divisions. In 2016. Performance Nutrition - mainly protein-based sports supplements and energy drinks - increased its sales by 9.1pc to just over €1bn and EBITA (earnings before interest, tax and amortisation) by 19.9pc to almost €163m. Nutritionals, the food ingredients and US cheese businesses, also did well last year with EBITA up by 4.9pc to €112m on broadly- unchanged sales of €1.22bn.

EBITA margins at Performance Nutrition were 16.1pc while the Nutritionals margin was 9.1pc. Compare this to the Dairy Ireland businesses. While sales at Dairy Ireland were up by 2.7pc in 2016, largely reflecting last year's partial recovery in international dairy prices, and EBITA was up 6.6pc to €30.7m, the margin was still only 5pc.

At the same time as it is selling majority ownership of Dairy Ireland to the co-op, Glanbia is doubling down on Performance Nutrition and Nutritionals.

Last month it announced that it was in advanced discussions with three local dairy co-ops to build a $400m (€380m) greenfield cheese and whey plant in the US state of Michigan while earlier this month it unveiled two acquisitions, Amazing Grass in the US and Body & Fit in the Netherlands, for a total of €181m.

The Michigan plant will add 30pc to Glanbia's US cheese manufacturing capacity while Amazing Grass and Body & Fit will increase Performance Nutrition sales by a further €100m a year.

By hiving off Dairy Ireland, Glanbia kills a number of birds with the one stone. Not alone does it get to concentrate on its higher-margin businesses, it also reduces the Co-op shareholding while at the same time giving its milk suppliers majority ownership of the dairy processing and agribusinesses operations that matter most to them. This represents an elegant solution to the problem of reconciling the sometimes competing interests of outside shareholders and milk suppliers.

The contrast with Kerry is stark. Almost 80pc of its 2016 sales, nearly €4.9bn, were from its taste and nutrition division. Trading profits - Kerry calculates the profitability of its divisions differently from Glanbia - on those sales were €716m giving a margin of 14.7pc.

The other €1.33bn of Kerry's sales came from its consumer-foods division, where trading profits were €117m and the margin was just 8.8pc.

However, Kerry has up until now resisted the temptation to separate its higher-margin taste and nutrition business from its lower-margin legacy business.

The market certainly liked the news from Glanbia with the share price jumping by over a euro to €18.50. At the current share price, Glanbia is trading at over 20 times its forecast 2017 earnings.

"The remaining divisions within Glanbia plc, Glanbia Performance Nutrition and Glanbia Nutritionals, are higher-margin and higher-growth businesses than Dairy Ireland, meaning that Glanbia plc should be able to sustain higher valuation multiples as a result," said Cantor Fitzgerald analyst Stephen Hall.

While the £115bn Kraft Heinz bid for Unilever was over before it ever really began, it did demonstrate that there is an appetite for well-managed food companies with good growth prospects.

Glanbia, shorn of most of its legacy dairy processing and agribusiness operations, certainly falls into this category. So could last week's restructuring announcement be the precursor to a takeover bid for Glanbia? The reduction in the co-op shareholding certainly reduces, even if it doesn't entirely remove, one possible obstacle.

At the current share price, the whole of Glanbia is worth almost €5.4bn. Assuming that the Dairy Ireland spin-off goes through this values Co-op's remaining shareholding at €1.7bn.

Based on the details of the current proposed share spin-off this would translate into an average windfall of €170,000 each for Glanbia Co-op shareholders who are also milk suppliers and €104,000 for non-milk supplying co-op shareholders.

With the dairy processing and agribusiness arms safely back under their control would the co-op shareholders reject a bid for Glanbia? Watch this space.

Sunday Indo Business

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