Nobody should be surprised by the proposal unveiled by Glanbia last week. Even fewer should be surprised when it sails through the vote in the coming months. This latest step in the long goodbye between the plc and the co-op was always going to happen after the watershed vote in 2012.
That was when Glanbia suppliers had their first marital fling – but only after they had slapped down the initial proposition by the plc two years previously. Everyone realises now that that was a step too far for the co-op faithful back then.
The plc learned its lesson. It beefed up its PR department with heavyweights from the world of both media and politics to ensure that future battles to win the hearts and minds of shareholders were not left to chance.
The process of weaning the farmers off the notion that they needed to hold on to the “family silver” then proceeded, but in much smaller steps. The 2012 vote was just the first, and Glanbia suppliers have done very nicely out of the share spin-outs that have flowed ever since.
It is estimated that close to €640m in shares and patronage options has been transferred to co-op shareholders since 2012, effectively replicating the wealth generation model that has lined the pockets of Kerry milk suppliers for the last 30 years.
The low profit margin Dairy Ireland division in Glanbia Plc increasingly looked like a lonely child as the company concentrated its efforts on building its turbo-charged nutritional ingredients business. Meanwhile, Glanbia Ingredients Ireland is all about milk processing, regardless of its profit margins.
And the deal is too sweet to be resisted by the vast majority of farmers. Don’t forget that most are still nursing their businesses along after 24 months of bruising milk prices. The €10,400 that the average supplier stands to receive from the 2pc spin-out will be welcomed with open arms.
However, there are some questions that farmers should ask themselves before they cast their votes. Here’s three for starters:
1. Timing: Is this the best time for farmers to invest in the commodity side of the plc’s business? Glanbia is the biggest maker of cheddar cheese in the world, and it is cheddar cheese that could be one of Ireland’s most exposed exports when Brexit washes through. We are dependent on the UK to suck up 60pc of the massive 165,000 tonnes of cheddar cheese that we produce annually. Glanbia’s Wexford plant is almost exclusively dedicated to this task, pumping out a reported 20,000 tonnes in 2015 alone. How much of Dairy Ireland’s €30m of profits are dependent on this market? Is it possible that they will be a lot less in two years’ time? Is there alternative outlets for cheddar or can these facilities be easily orientated into other product lines?
2. The Price Tag: Is €112m a fair price for Dairy Ireland? Glanbia argue that it has to be a fair price to comply with stockmarket rules. The price-earnings ratio on last year’s sales of €616m and 5pc profit margin works out at an attractive 6.2.
But if we look at the average over the last five years, the profit margin is closer to 3pc on average sales since 2012 of €630m. Using these figures the price-earnings ratio is closer to 10. Is this too high for such a low-margin business?
3. The Strategy: Farmers are getting more comfortable cashing in their assets. Indeed, it could be argued that converting their shareholding in the co-op into shares in the plc gives them more options in terms of dividing up assets among the next generation – as many a Kerry farmer will testify to.
It also brings more transparency to what the actual return is on both parts of the business – milk processing versus flavours and ingredients. Carbery Group suppliers are generally a contented bunch because their co-op is able to siphon profits from their hugely profitable flavours and ingredients businesses to subsidise milk prices to the point that they consistently have the highest price in the country.
But how do those milk suppliers know if they should be getting a 2c or 5c top-up in their milk price? Is it more transparent to break out those businesses and pay the farmer shareholders a separate dividend?
Finally, why does it make sense for farmers to invest in the part of Glanbia that has the lowest profitability? This is one that may have farmers scratching their heads for longest. In reality, the horse has bolted on Glanbia Plc, and it is going the same way as Kerry, albeit in a slightly different format.
The real opportunity for Glanbia suppliers might now be that they have a business that is very similar to their neighbours in Lakeland Dairies, Dairygold, Arrabawn and Aurivo. It brings the industry back to that prickly subject of why it can’t get together to act as one, rather than the current halfway-house of Ornua that is effectively competing with individual Irish co-ops. Glanbia Ireland will have the scale to be a starting platform from which other co-ops can join to create an emerald Fonterra.
Who can claim that scale is irrelevant while they try to compete in global commodity markets? The new Glanbia Ireland business might well be the perfect springboard.
Fast facts on Glanbia proposal
Plc is offering to sell 60pc of its agri-business and consumer foods divisions to the co-op for €112m.
The purchase will become part of the existing joint-venture between the co-op and the Plc, effectively combining GIIL and Dairy Ireland under the tidier banner Glanbia Ireland.
It will have annual sales of €1.5bn, and be by far Ireland’s largest processor with a milk pool of 2.4bn litres.
The deal will be financed by the sale of 3pc of the co-op’s 36pc stake in Glanbia Plc, currently worth about €1.9bn. €40m will be put aside as a crisis fund.
A further 2pc of the co-op’s shareholding will be spun-out to farmers, netting them over €105m at €18 per share.
Co-op members on board of the Plc reduces to 6 (43pc) by 2022.
Co-op will allow its stake in the Plc to drop to 28pc in the future.