Tax, milk price, emissions and geography all featured at the first information meeting held by Kerry Co-op on the proposal to buy Kerry Group’s dairy business, Kerry Dairy Ireland, for €500 million.
Around 120 shareholders and milk suppliers were present at the Dingle Skellig Hotel in west Kerry today (Monday, November 25) to hear the co-op’s business case for the milestone deal.
Jim Woulfe, the strategic advisor to the board of Kerry Co-op, told the meeting that the proposal would unlock the value of shares in a tax neutral manner, move control of milk processing back to the co-op and resolve the long-running leading milk price dispute.
Woulfe said that Kerry Dairy Ireland, with a forecasted revenue of €1.3 billion for 2024, is a “sustainable business that is well run and efficient”.
He said that the deal has undergone around three months of “detailed diligence” by a range of financial, tax, legal, engineering and environmental experts, including PWC and EY.
Kerry Dairy Ireland processes over 1.1 billion litres of milk annually from 2,740 family farms across Munster, has 7 production facilities across Ireland and the UK and has a range of well-known consumer brands such as Cheestrings, EasiSingles, LowLow, Kerrymaid and Charleville.
The business, which employs over 1,500 people, also operates 31 agri-services stores across Kerry, Limerick, Clare and north Cork.
Simon MacAllister, from EY, explained that the €500 million Kerry Dairy Ireland valuation is based on a four-year average of earnings before interest, taxes, depreciation, and amortisation (EBITDA) of €71 million.
He said that the overall sale price of €500 million cannot increase, but could reduce “if the business underperforms”.
He said that Kerry Co-op would have full control of the milk price and capital investment decisions.
Shares
Kerry Co-op currently holds just over 19 million (11%) of the shares in Kerry Group, worth around €1.7 million.
The proposal would see 85% of those shares spun out through a share exchange programme to the 11,906 Kerry co-op members, valued at around €1.4 billion.
The remaining 15%, worth around €250 million, would be used by Kerry Co-op towards the cost of acquiring an initial 70% stake in Kerry Dairy Ireland (€350 million), with Kerry Group retaining a 30% stake.
MacAllister said that the balance would be made up of €56 million in loans from banks (two Irish and two international) and a loan of around €43 million from Kerry Group.
The co-op would have a call option to acquire the final 30% stake in Kerry Dairy Ireland at any time until mid-2030. The full transfer of the business to Kerry Co-op must be completed by 2035.
The final 30% (€150 million) would be financed through a 1c/L milk supplier contribution over six years, retained earnings of €20 million and €80 million of refinanced third party debt.
The meeting heard the milk supplier contribution will be collected from April to October, with the board having the ability to pause the payment in certain circumstances.
The payment will become “convertible loan stock” meaning that suppliers have the option to convert it into co-op shares. In the case where a supplier leaves or retires they will receive their full contribution back.
MacAllister said that B and C shareholders would have the option to contribute, but the payment will be mandatory for A shareholders (milk suppliers).
Jamie Olden from the legal firm RDJ LLP “strongly” recommended the proposed €50 million fund from Kerry Group to resolve the ongoing arbitration dispute over leading milk price.
The meeting heard that the legal advice of a senior counsel was that the risk of getting a worse result in arbitration would be far greater than the risk of achieving more that the cumulative payment to suppliers of 5.4c/L.
James Tangney, Kerry Co-op chair, acknowledged the disappointment that the fund is linked to the overall joint venture deal being accepted, but said that this offer was “the best possible outcome” for milk suppliers.
Kerry Co-op
One shareholder at the meeting said that a “written guarantee” should be sought from Revenue confirming that there would be no tax implications arising from the share exchange programme.
Ronan Macnioclais from PWC said that it is Revenue policy not to provide such guarantees, but added that the transaction has been explained “in full detail” to Revenue in advance.
He said that Revenue has issued a letter outlining that they are “happy with the transaction”.
Another shareholder claimed that scope 3 emissions could cost Kerry Dairy Ireland around €170 million up to 2030.
Jim Woulfe said that scope 1 and 2 emissions are within the scope of Kerry Dairy Ireland, while 95% responsibility for scope 3 emissions “rests within the farm gate” and is not a cost factor for the business.
He said the business plans include a “range of initiatives” to reduce scope 1 and 2 emissions by 48% by 2029 when compared to 2017 levels.
A co-op member, who is in favour of the deal, said that suppliers on the Dingle Peninsula were concerned about milk collection if the dairy business was “sold onto some other entity” as they are “geographically off the beaten path”.
Another member said that he would be voting against the deal due to the loss of the existing share redemption scheme which he said was beneficial to his family’s circumstances.
PWC is holding briefings with local tax advisors and everyone present was urged to seek their own individual tax advice.
In response to a question on milk contracts, James Tangney said that a new supply contract would be presented to suppliers around March or April of 2025.
The meeting heard that it is the aim of the board is to pay “a very very competitive milk price”.
Vote
In total, Kerry Co-op will host 14 information meetings on the proposed deal between now on December 5.
In response to criticism about a lack of more detailed information on the proposal, Kerry Co-op said that a 30-page document would be sent to A and B shareholders next week and will also be available on the co-op website.
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.
Kerry Co-op will be running bus services to the Killarney meeting from across the catchment to facilitate those who want to attend.