Glanbia suppliers are kingmakers as negotiations enter vital phase
There's a lot left to play for as the battle now centres on winning 75pc approval in two crucial votes
ITS hurlers are going for five in a row this summer, but the whisper of "win win" that permeates the Kilkenny countryside concerns something far removed from Henry Shefflin's prowess on the GAA field.
It's been almost a month since dairy giant Glanbia unveiled plans to sell off its Irish businesses to its co-op shareholders in a deal so mutually beneficial it was described as a "win win" by plc boss John Moloney.
That "win win" is now being dissected -- in towns and villages stretching from Glanbia's Kilkenny homestead to the rugged highs of Donegal and the depths of east Cork -- by the 8,500 farmers and suppliers who make up the co-op's shareholder base.
In about a month these co-op members will gather for two crucial votes on the deal.
Unless 75pc of them approve it, Project Separate Glanbia -- the biggest Irish corporate deal of the year -- will be dead and buried.
Dominating their agenda so far is the issue of money -- including how much the co-op should pay for the Irish assets, how much of the plc's debt the co-op will have to take on to its balance sheet, and how the deal will be financed?
But there are finer talking points too.
Glanbia is offloading its Irish businesses because they've been a consistent drag on earnings.
But will the co-op really be able to make a better go of things?
The Irish business will be able to take advantage of the abolition of dairy quotas to ramp up milk production, but how much will the co-op have to invest for that increased production to happen?
And then there's the partisan arguments across the co-op's 4,200 dairy farmers, 3,000 grain suppliers and 1,300 recently-retired shareholders.
The deal is being sold to the co-op's farmers as a way for them to regain control over their own destiny. Key to this is dairy farmers receiving higher milk prices.
But what about the grain suppliers and recently retired shareholders?
The farmers aren't the only ones who've been mulling over the proposed deal.
With 55pc of Glanbia plc's shares held by the co-op and another 15pc to 20pc held by individual farmers, retail investors have always been a minority force in the group.
That could all change, and quickly.
If the deal goes through, the co-op will have to sell a significant chunk of its plc stock to fund the purchase, a development that could see more than 30pc of Glanbia plc come on to the open market.
Faced with that scenario, investment houses and fund managers are looking at Glanbia in a new light.
Should they sell shares now before a significant tranche of stock comes on to the market, most likely at a discount?
Or should they build their stakes now, so they can be a significant part of the "new Glanbia"?
Market players are also mindful of the fact that the deal could also see the co-op's stake in Glanbia reduced below the crucial 25pc mark, potentially making the group a takeover target for private equity houses or bigger industry peers.
Meanwhile, the core Glanbia that will emerge if the Irish division is sold off -- a heavily US-focused business with margins in the 11pc range -- is giving professional investors plenty more to think about as D-Day with the co-ops looms.
Glanbia co-op chairman Liam Herlihy will be going into D-Day armed with the answers to many of the questions that his members are getting most exercised about.
By then a price will have been agreed, most likely in the range of €310m to €350m net of a €70m pension liability.
And the co-op is also expected to have a funding strategy firmed up, complete with some visibility over the price it can place shares at.
But while the extra information should help Mr Herlihy allay concerns, he'll have the heavy hand of history weighing on him, such is the bad name co-ops have managed to make for themselves.
For years they've been considered as touchy-feeley organisations that lack commercial sense, and as poorly managed with no hunger for success when compared with a plc.
Of course, this image hasn't been helped by the problems experienced at Glanbia's nearest neighbour Dairygold co-op over the past number of years.
Dairygold has experienced serious problems over the past three years, which has resulted in the co-op selling off its key food ingredients brands to Kerry group, and re-absorbing its troubled 4Homes division into its trading agri-business.
In addition, its Reox holdings property play is effectively dead in the water.
After years of so called "rationalisation and diversification", Dairygold is now a simple producer of commodity dairy products, struggling to pay a competitive milk price to the farmers who supply it.
Geoff Meagher, the former Glanbia number two who is advising the co-op on the deal and will act as the interim CEO should things progress, paints an entirely different picture for the new Glanbia co-op entity
"This is a superb opportunity for farmers to own a vibrant business that can provide leadership in the dairy industry," he says of the proposed deal.
Describing them as "well-run, well-invested and well-rationalised", Mr Meagher believes the businesses have the potential to deliver operating margins of 4pc to 5pc, or annual profits of close to €50m, against profits of €24m on a €1bn turnover last year.
Market sources stress that the co-op's success in hitting those targets and avoiding the pitfalls of co-ops gone before will hinge on the calibre of the management.
"We will look externally and internally in our search for a new CEO," says Meagher.
"We have three strong CEOs in each of the business units -- namely Colin Gordon, CEO Consumer Foods Ireland; Colm Eustace, CEO Glanbia Agribusiness; and Ger Mullally CEO Glanbia Property, but we will also look outside the company.
"The culture and ethos of the plc must be maintained in the new co-op structure. We have that plc culture now -- it's ours to lose it."
Mr Meagher says the plc model has worked well and delivered value to the shareholders but "arguably it could have delivered more value for the farmer".
"It's not possible for the plc to support milk price and take a hit on earnings as it did last year," he says.
"Another significant dip in performance would be damaging to the share price and the credibility of the plc. Ultimately, the plc's role is to grow shareholder value. The co-op would focus more on farmer interests."
Mr Meagher won't get to prove his argument unless 75pc of the co-op's members can be brought round to his way of thinking, and therein the battle lies.
Much of Glanbia's efforts to date have gone into convincing the dairy farmers that this is a good deal.
But the love/hate relationship between dairy and tillage farmers won't help their cause.
The co-op leadership will have a mammoth task on their hands to convince their 3,000 grain shareholders that this deal will also deliver value of them.
"The new co-op entity would offer security to the grain farmers.
"Glanbia is the biggest buyer and seller of native grain and we are a very committed business," Mr Meagher says.
For milk producers the attraction is the possibility of a stable milk price, given that volatility in the dairy sector is likely as quotas are to be abolished after 2015. But Glanbia guaranteed milk price once before and you won't see it doing it again.
Dairy markets are improving but the co-op's total focus can't be on guaranteeing milk price at the expense of other sectors of the business.
The co-op is also understood to be offering members a one-off cash payout as a sweetner to encourage the transaction. The mechanism under consideration would see farmers offered plc shares in exchange for old co-op shares. These plc shares could then be sold on the open market, giving farmers a welcome income boost in a difficult financial times. This could far well be the sweetner that will clinch the deal.
"Some value will be given back to our membership as part of this deal," says Mr Meagher.
"There has to be some sort of recognition of what the co-op built up over the years."
While the co-op members' verdict on the proposed deal won't be revealed until those two votes in May, clear signs from institutional shareholders and retail investors are emanating already.
When the deal was announced on March 10, Glanbia's shares opened at €2.60.
These days they're hovering in the €3.00 to €3.10 range.
Dolmen's food analyst Oliver Gilvarry puts the rises down to the value investors see in a Glanbia freed from its Irish shackles.
"With the disposal of a lower margin business the company would be left free to focus on higher margin activities and the balance sheet would be freed up for acquisitions," he says.
Merrion food analyst Sam Farthing, however, sees something more complex at play.
"There seems to be good demand for the co-op shares and some investors may be positioning themselves in case they don't get all they want in the placing," he said.
The rising share price has also changed the dynamics around how the co-op might structure a deal. In a note to clients on March 24, Mr Farthing suggested the co-op might get its shares away at €2.30, a discount of about 10pc to the prevailing market price. The "current share price strength" means they might be able to sell the shares for more, Mr Farthing believes.
The better the price the co-op can sell its shares at, the fewer shares the co-op has to sell, and the bigger stake the co-op will retain.
If the co-ops got the shares away at €2.30 a piece, they'd have to sell 135 million shares to fund a €310m acquisition, leaving them with 33 million or almost 11pc of Glanbia plc.
If they got the shares away at €2.80 a share, they'd only have to sell 111 million shares, leaving them with a 19pc stake.
The bigger the stake, the easier the sell to the co-op members, who'll be keen to retain ties with the plc from an emotional and dividend point of view.
If the stake ends up at less than 25pc, then analysts expect the stock to surge in value since the plc could no longer block a takeover. "It could be attractive to some other food companies or a private equity company," says one market source.
Even without a takeover attempt, a smaller co-op shareholding will be a positive driver for the stock.
Mr Gilvarry points out that Glanbia has been disadvantaged by the relatively poor liquidity in its stock, something that would be eased greatly, potentially enticing in more investors.
The Glanbia that would also emerge from the deal would be a heavily US-focused business, making it more attractive to US investors.
The plc is understood to have made no decision on a potential US listing, but the stock is already being traded Stateside via ADRs (American Depositary Receipt) and that trade could increase, facilitating more US shareholders. Among the institutions, it seems the plc's half of the "win win" is being roundly accepted, provided the amount the co-op pays for the Irish business isn't low to the point of insulting. Among the co-op members, there's a lot left to play for, and stepping up to the chairman's perch for the first of those crucial votes in May, Mr Herlihy could be forgiven for envying Kilkenny hurling manager Brian Cody.
Cody must accomplish only one mammoth task -- this year's All Ireland-- whereas Mr Herlihy must do it twice and win two votes.