November 6th 1999

Mid-West confirms merger talks with Nenagh

By Des Maguire

The board of Mid-West Co-op has written to its supplier/shareholders this week confirming that the society is involved in talks with Nenagh Co-op which may lead to a possible merger.

Mid-West has had a successful trading relationship with Nenagh since 1994 when a decision was made to sell a substantial portion of their skim milk to the Co-Tipperary co-op. A merger of the two societies would create a joint milk pool of almost 60 million gallons.

"Although the future of your society is secure, your board believe that in order to maximise the use of the processing facilities both in Kilconnell and Nenagh, we should look at closer integration between our two societies," the Mid-West letter to suppliers says.

"One of the opportunities which both societies have agreed to consider as an option for the future, is merger," it goes on.

"To date the Executive Committee of your board has been engaged in discussions with a sub-committee of the board of Nenagh on all aspects of the merger process.

"Those discussions have resulted in considerable progress on reaching agreement on the many and complex elements to merging our two businesses.

"The talks are not yet concluded. If and when an agreed package is finalised, you will be the first to know when we put it before you, the milk supplier shareholders, for a decision. In the meantime, we will inform you directly if there are any significant developments."

The letter has been signed by Eamon O Connor, chairman of the executive committee, Seamus Lohan, vice-chairman and Francis Tuohy and Tomas Colleran, both members of the executive committee.

They reveal that the review of the future direction of Mid-West began last year in advance of the changes to E.U. dairy policy which will impact on the Irish dairy industry over the next ten years or so.

Merger could lead to a possible 3p per gallon savings

The Journal understands that while Nenagh Co-op have made two presentations to the board of Mid-West, one in April and the second in September, a formal decision on merger has yet to be taken by the Mid-West board.

This will be made by the new board, as Mid-West holds its annual general meeting next Monday and will have a new chairman and possibly a few new board members after this.

Last year saw Mid-West's retained profit levels for the year recovering from £65,330 in 1997 to £191,781 for 1998 on sales of over £32 million.(See agri-business pages)

It is likely to be the New Year before any special general meetings are held to consider a possible merger. An agreed package will first have to be voted on by both the Mid-West and Nenagh boards and then put to shareholders in both societies.

While no details of the talks between Mid-West and Nenagh have yet been released it is understood that among the options being considered is that after a transition period all liquid milk processing and packaging in both societies (around 4 million gallons) will be consolidated at a central site at Kilconnell while all butter-making would be centralised at Nenagh.

Mid-West currently manufactures 3,000 tonnes of butter a year at Kilconnell for the Irish Dairy Board but does not make butter during the winter period.

A new purpose built liquid milk despatch store would be built at Oranmore to get maximum benefits from the expanding but very competitive liquid milk market in Galway city.

The intention would be to build a new central liquid milk processing plant at Kilconnell capable of processing in the region of 10,000 gallons of liquid milk per day plus approximately 3,000 gallons of cultured buttermilk per week. The raw milk would continue to be sourced from current liquid milk producers in Mid-West and Nenagh and the Oranmore and Nenagh brands would continue as is, in addition to other new brands.

The proposal would give a new vitality to Kilconnell, it is suggested, providing the area with a strong core business with further potential to expand.

It would also expand butter throughput at Nenagh with an opportunity to produce increased amounts of Kerrygold lactic butter in the May to August period in particular which would earn a premium in the region of 2p per gallon on the additional butter produced under the society's lactic butter quota.

It is understood that Nenagh have advised Mid-West that savings of 3p per gallon could be achieved under this re-structuring.

The centralisation of butter-making at Nenagh would result in a lp per gallon saving, it is suggested. Carriage would be targeted for a 1.5p per gallon saving and restructuring of administration would yield over 0.5p per gallon. It is claimed that farmer milk price could be kept within 11.5p of the Irish Dairy Board's on-account price.

Mid-West have been advised by the Department of Agriculture that it will be possible to ring-fence the two milk pools in a merger situation.

In relation to milk testing the Nenagh side have agreed that if the liquid milk operations are based at Kilconnell the liquid milk laboratory activity would transfer to Kilconnell.

Creamery milk assembled through Kilconnell could be tested for TBC at Kilconnell.

Milk assembled south of Kilconnell would integrate in time with the Nenagh milk assembly system and would be tested for TBC in Nenagh.

Testing of all suppliers milk for fat, protein, SCC and milk ring would be undertaken at Nenagh. The Nenagh side have also told Mid-West that they would be very supportive of developing the store system that is in place in Midwest.

ICOS personnel have been advising Mid-West on the delicate issue of distributing its reserves, put at £5 million. While the co-op has over 3000 shareholders only 600 of these are supplier/shareholders. The average size of the 600 suppliers is 30,000 gallons.

However only milk supplier shareholders will be entitled to vote on any merger proposal. The society's rules were changed last year -in line with many other co-ops - to ensure that only milk supplier shareholders can vote on major decisions such as amalgamation.

However all existing shareholders would become shareholders in the new merged society and dry shareholders could be eligible to receive bonus shares, depending on the basis of a bonus share issue.

However only milk supplier shareholders and actively trading shareholders would be eligible for membership of the committee of the new co-op

As part of the merger discussions it has been suggested that a 65 person board be established divided 24 for Mid-West and 41 for Nenagh.

A two-thirds majority would be required on vital decisions. Nenagh would be three votes short of this two thirds majority.