The chair of Kerry Co-op James Tangney has told Agriland that he is “very confident” that members will back the proposed €500 million purchase of Kerry Group’s dairy division, Kerry Dairy Ireland.
Following months of “intense” negotiations, it was confirmed today (Tuesday, November 12) that a proposed deal has been agreed between Kerry Co-op and Kerry Group.
Initially, Kerry Co-op would acquire a 70% interest in Kerry Dairy Ireland for €350 million, with Kerry Group retaining a 30% stake.
The co-op would then have a call option to acquire the final 30% stake at any time from completion of the initial acquisition until mid-2030.
Both parties are hoping to have the first phase of the deal completed by the end of January 2025.
However, this will all depend on the approval of both Kerry Group and Kerry Co-op shareholders.
James Tangney said that the proposal, in its totality, represents a good deal for all Kerry Co-op members as it releases the value of €1.4 billion worth of shares in the most tax efficient manner, acquires the assets of Kerry Dairy Ireland and resolves the long-running arbitration dispute.
The co-op is now to embark on a series of information meetings over the coming weeks in a bid to secure support from shareholders.
Kerry Dairy Ireland
Kerry Dairy Ireland processes over 1.1 billion litres of milk annually from 2,740 family farms across Munster in six dairy manufacturing facilities across Ireland and the UK.
The business operates 31 agri-services stores across Kerry, Limerick, Clare and north Cork, as well as a feed mill in Kerry.
It has a range of well-known consumer brands such as Cheestrings, Dairygold, EasiSingles, LowLow, Kerrymaid and Charleville.
Jim Woulfe, the strategic advisor to the board of Kerry Co-op, told Agriland that the co-op envisages having 100% ownership of new entity by the end of this decade.
He said that the €500 million valuation was arrived at following an examination of the returns of the four business divisions within Kerry Dairy Ireland.
The name ‘Kerry Dairy Ireland’ will remain for the duration of the joint venture, but once Kerry Co-op takes full ownership, the board will then decide on what it shall be called into the future.
Woulfe said that due diligence on the deal has been “very comprehensive” and the business model includes “ongoing investment”.
Around €25 million will be earmarked on an annual basis for plant replenishment, efficiency and improvement.
“We have done forward planning projections based on generating an earnings before interest, taxes, depreciation, and amortisation (EBITDA) of approximately €70 million or €70 million plus.
“Of course, there will be capital going in every year to replenish assets, improve assets, bring efficiency into the business,” he said.
Kerry Co-op
The co-op currently holds an 11% shareholding in Kerry Group with a value of around €1.7 billion.
The proposed deal would require a share exchange and an associated redemption process whereby the co-op shares acquired by Kerry Group plc will be redeemed and the co-op will cease to be a shareholder in Kerry Group.
This share exchange would involve 85% of co-op shares being converted into Kerry plc shares at the rate of 6.25 plc shares for every one co-op share held.
The co-op said that this would release the value of around €1.4 billion worth of Kerry plc
shares directly to members to hold or sell at a time of their choosing.
There would be no tax implications from the share spin-out, until such time as a member decides to sell the shares.
The co-op said that the remaining 15% of co-op shares, which would be worth an estimated €250-260 million, will be used to buy Kerry Dairy Ireland.
“Every [current Kerry Co-op] shareholder, the A, B and C shareholders, will be the same. They’ll own it in identical fashion. Nobody’s losing any rights here, status doesn’t change.
“They’ll own it in its entirety going forward, when it’s ultimately bought. They’ll own 70% first and ultimately, they’ll own it in full.
“In other words, that 15% instead of owning shares in Kerry Co-op, you’ll be owning Kerry Dairy Ireland, ultimately,” Woulfe said.
All co-op members who retain the Kerry Group shares received by them as part of the transaction will receive a full dividend directly from Kerry Group in line with the value of their individual shareholdings in Kerry Group.
In addition, it is the co-op board’s intention to pay a dividend from the returns of the Kerry Dairy Ireland business, in line with other co-ops.
In order to reach the €350 million needed to buy the 70% interest in Kerry Dairy Ireland, the co-op will fund the balance through loans from third party banks and Kerry Group.
A 1c/L “participation contribution” will apply to milk supplies over a five-year period as a means of paying back these loans.
Tangney said that this contribution “can be looked at” again by the board in the future as the business models are “very conservative”.
Milk price
As part of the deal, Kerry Group will be entitled to a fixed dividend of €7.5 million per annum during the period of the joint ownership.
The Kerry Co-op chair said that this fixed dividend will give “greater certainty” to the board in managing the business and in setting the milk price.
The milk supply agreement between Kerry Dairy Ireland and milk suppliers expires in April 2026.
After closing, the new board of Kerry Dairy Ireland will determine the milk price going forward “with the intention of paying the maximum price achievable to its milk supplying members”.
“On our projections and with the business we’re acquiring with consumer foods, which is a huge part of our business, Kerry Co-op will definitely be in a strong position on milk price,” Tangney said.
Arbitration
As part of the proposed deal, Kerry Group will establish a €50 million fund for “the resolution of the ongoing dispute and related claims and arbitrations between Kerry Creameries Ltd. and certain milk suppliers”.
James Tangney explained that under the fund a cumulative total of 5.4c/L will be paid to everyone who supplied milk to Kerry Group in the years from 2015 to 2020 as per their milk supply contract.
It was noted that 5.4c/L payment will be split across that period and will vary depending on the difference between the price paid by Kerry and the leading milk price in a given year.
Tangney said this payment, coupled with a €30 million payment made by Kerry Group to suppliers in 2020, equates to 81% of the total arbitration claim on leading milk price by suppliers.
The payment, which is dependent on the first phase of the joint venture deal being completed, will be made as per the terms of their milk contract.
“It is tied to the deal, but it’s a settlement deal that could not have been achieved without the deal, or vice versa,” he said.
Tangney said the co-op board considers this to be a “good outcome” and a “win” for milk suppliers as it achieved 81% of what was sought.
“I think that the 5.4c/L will be definitely well accepted because it is a good settlement on an ongoing dispute, from 2015 whereby we were only arbitrating at present on 2015 on its own,” he said.
Information meetings
A Special General Meeting (SGM) of the Kerry Co-op will take place at 12:00p.m on Monday, December 16, 2024 at the Gleneagle INEC Arena, Killarney, Co. Kerry.
The proposed transaction will only proceed if approved by the required majority (66%) of the co-op’s A and B shareholders who are present at that meeting; there will be no postal vote.
An information brochure with details of the proposal will be distributed to co-op members in the coming days and will also be available on the co-op website.
Ahead of the SGM, the co-op will be hosting a series of information events for all shareholders at venues in Kerry, Limerick, Cork and Clare.
“We’ll be about three weeks on the road dealing with town hall meetings and other meetings like that because we do intend to brief people properly and that they’ll come as informed members of the co-op to make a decision.
“So we do encourage people to come out to your local meeting, ask your questions, seek clarity. We will have a team of experts to explain all aspects of the deal at those town hall meetings,” Woulfe said.