Kerry Co-op: What’s at stake in bid for milk processing joint venture

Kerry Co-op needs to be aware of all the pitfalls of a proposed deal to go into a joint venture to take over the milk processing division of Kerry Group, according to one milk supplier and co-op shareholder.

This follows the emergence of a potential third-party buyer for the milk processing business, which has increased the price of this to €800 million.

Speaking to AgriLand, Fergus McCarthy, a Kerry Co-op member and dairy farmer from Co. Limerick, outlined concerns he has regarding the proposed venture – and how it may be achieved.

“As a Kerry Co-op shareholder, I am very concerned about the latest proposed bid by the co-op to increase the current offer of €640 million to €800 million in order to be allowed to do a due diligence on the new joint venture,” the farmer said.

He highlighted that the venture would see the creation of a company that will be on a 60:40 ratio for the co-op and plc respectively.

Continuing, McCarthy noted that this new entity will have a proposed profit of €78 million.

“As milk processing is part of this business and well recognised as having a 2% to 3% margin there is very little room for interest and bank repayments,” he added.

This would mean the co-op would need to put up 60% of the new valuation of €800 million – some €480 million.

Kerry Group plc have another buyer for the business and the entry point is that they have to bid €800 million to do due diligence; they won’t be allowed to look at the books.

Consultant firm PWC, acting on behalf of the co-op, recommended that the €640 million was the top price that the co-op board, for its main sustainable business, the farmer added.

Concerns

First up, McCarthy warned that Kerry plc has never dealt with the ‘leading milk price’ issue which he said could “wipe €20 million off” the proposed €78 million profit.

The joint venture would be similar to Glanbia Ireland, which is 60% owned by the co-op; however, Glanbia Ireland, McCarthy noted, was 5.5 times the earnings before interest, tax, depreciation and amortisation , whereas the Kerry joint venture is at a multiplier of 10.1.

In addition, he said: “Dan O’Connor told farmers at public meetings after the arbitration ruling that they were owed a lot of money and that he as the man leading the co-op legal team would get it for them.”

Secondly, the dairy farmer raised concerns about proposals voiced to the board of the co-op to change the multiplier conversion from co-op shares to plc shares from the current 5.9 [i.e. 5.9 Kerry Group plc shares for each Kerry Co-operative Creameries Ltd share] down to 5.4.

Commenting on this, he said: “Every .1 of a drop will raise €40 million and will take €11.40 of the price of each share.

Therefore a .5 drop will see the value of the co-op share fall by €58 and the average shareholder who has 250 shares will lose €14,500.

On another note, McCarthy highlighted the different categories of shareholders among the co-op’s membership.

Co-op membership

At December 31, 2018, there were a total of 13,335 shareholders on Kerry Co-Operative Creameries Limited’s register in the three categories: 3,352 (25.14%) A Shareholders; 3,346 B Shareholders (25.09%); and 6,637 C Shareholders (49.77%).

A shareholders are active or recently retired milk suppliers; B shareholders are milk suppliers retired for more than five years; and C shareholders are members with no involvement in milk supply, e.g. inheriting or buying shares from others.

On this, McCarthy said:

The new entity will be only for A shareholders who supply milk; the B and C shareholders, while funding the new structure, will never benefit from it while new entrants with just a token share [one share to have voting rights] will.

“For the deal to go through it looks likely that the B shareholders who normally have a vote and can attend the AGM will not have a say,” he warned.

As things stand, C shareholders cannot nominate or be nominated for any election to any committee or sub-committee of the co-op or the board, while B shareholders cannot be nominated for election or vote at any meeting convened to consider amalgamation, sale or liquidation of the co-op.

McCarthy highlighted that there’s no easy answer but it’s important to keep in mind the need to work for the benefit of all shareholders.

“It’s a very valuable business to everybody, but to untangle it is certainly complex. It’s definitely not a ‘one-size-fits-all’ solution that’s needed as there are too many different sizes inside it.”