Almost a year after the deal was first announced, the European Commission’s competition authority last week cleared the way for Larry Goodman’s ABP Group to acquire the Allen family’s 50% stake in the Slaney Foods business.

While the approval of the deal came as no great surprise, questions remain as to what the ABP-Slaney tie-up means for the meat industry in Ireland, both north and south of the border.

Benefits for ABP

Firstly, the benefits of this stake in Slaney are significant for ABP. Slaney is a business with annual sales over €320m, although margins are tight at between 1% and 2%. Added to this, Slaney operates from a state-of-the-art cattle slaughter and de-boning facility in Bunclody, having invested some €20m in the site since 2001. It also brings with it Irish Country Meats (ICM), the lamb processing business that has 40% of the Irish lamb kill.

This deal also provides ABP with access to the lower volume but premium business with Marks & Spencer.

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However, the real prize for ABP is most likely from a supply chain perspective and the 85,000 head of cattle slaughtered by Slaney every year. The large retailers in the UK and Ireland, most of which are customers of ABP, are demanding greater supply chain integration following the horsemeat scandal.

The horsemeat scandal highlighted the level of inter-trade between ABP and many of the independent meat plants and wholesalers who were dependent on ABP as an outlet.

By taking a share in the Slaney joint venture, ABP is aiming to tighten its supply chain and move away from meat inter-trading.

Customers

ABP has built strong relationships with most of the largest supermarkets in the UK, which require huge volumes. The Slaney deal will help reinforce these partnerships. As well as this, ABP stands to gain from the customer portfolio of ICM, which is seen as one of the leading lamb slaughter businesses in Britain and Ireland. Alongside this, Slaney has strong partnerships with retailers on the continent.

ABP will also see long-term potential in Slaney’s contract with McDonald’s, for which it supplies forequarter minced meat.

One in five of McDonald’s burgers eaten throughout Europe are produced from Irish beef and it is a highly lucrative contract as can be seen when Dawn Meats secured a deal valued at €300m in 2012 with the fast-food outlet supplying 18,000t of beef annually.

Longer term

For ABP, the immediate benefits of this deal are clear to see. Slaney Foods is a well-established business with an export focus that has the potential to make significant gains from ABP’s scale, market reach and broad customer portfolio. But where does this leave Linden Foods, the other partner in the Slaney joint venture?

Linden Foods is based in Dungannon, Co Tyrone, and is majority owned (88%) by the farmer co-op Fane Valley. The remaining 12% stake is owned by the Waugh family. For many, the fact that Linden did not buy out the Allen family’s 50% share in Slaney Foods raises questions to its commitment to meat processing in the south.

Although Larry Goodman’s ABP has a number of successfully run joint ventures including C&D Foods, it would not be surprising were ABP to move to acquire the Slaney business outright at some point down the road.

However, buoyed by the European Commission’s decision, ABP might move to acquire the entire Linden Foods business itself and thereby take complete control of Slaney while at the same time taking a tighter grip on the processing sector in Northern Ireland.

The attraction of such a move might lie in the relatively close grouping of ABP’s factories at Newry and Lurgan with Linden’s factory in Dungannon. It is easy to imagine how the slaughter of these three facilities could be merged without losing much of the cattle supply base.

Fane Valley’s chief executive Trevor Lockhart has reaffirmed to the Irish Farmers Journal that the co-op is committed to remaining in the meat processing sector. Although it is early days, there could be synergies to be gained from this new partnership with ABP.

Last year, Linden Foods reported sales of close to €420m and operating profits of more than €4m, which includes the share from the Slaney joint venture. The group typically has operating margins of 1% to 2%.

However, more than two-thirds (€2.7m) of operating profits are generated from the Slaney business, meaning that Linden will be slow to part ways with its profitable joint venture stake.

Overall, Linden reported profits or earnings (EBITDA) of €6.7m for 2015, giving the group a tight earnings margin of 1.6%. Typically, a business like Linden would command a seven to 10 times earnings multiple but of course this would depend on automation of the production lines and value-added products.

As such, a price tag at the upper end of the €50m to €70m range would be likely for the Linden business. But even though Fane Valley has recently offloaded its dairy business to Lakeland, it may be far less willing to sell its meat processing company to a private company.

Read more

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Full coverage: ABP-Slaney deal