Shareholders in Glanbia co-op will vote next week on the proposal to sell 3% of its shareholding in Glanbia plc and use the funds to acquire a majority (60%) stake in the plc’s consumer foods and agribusiness division, known as Dairy Ireland. If passed, the deal will see a further 2% of shares spun out to co-op shareholders in the form of plc shares valued at more than €100m.

Since the proposal was presented in late February, farmer reaction has generally been low-key, although attendance at the ongoing regional information meetings has been strong with good farmer engagement.

We have received a number of letters received in the past week, each legitimately questioning various aspects of the proposal. However, the general response from farmers has been positive.

ADVERTISEMENT

Our agribusiness team and Pat O’Toole tease out the complexities of the proposal. In its simplest form, what farmers are really being asked is whether selling an apartment within an apartment block they own in Dublin, in order to buy a neighbouring farm, is a good investment strategy.

The apartment block is this analogy represents the co-op shareholding in Glanbia plc. It has increased significantly in value over the past five years. Accepting the proposal would effectively mean liquidating a small proportion of this equity growth – one apartment within the block – to fund another investment.

The purchase of the farm represents acquiring a controlling shareholding in Dairy Ireland.

Like the farm, it is generating a steady return, albeit lower than the historic performance of the apartment block.

As with any investment, it is a case of making the call based on what you know, your appetite for risk and your investment goals. Few could argue that in terms of current value, with plc shares trading at 26 times earnings compared to 16 times earnings when the decision was taken to reduce the co-op shareholding in 2012, the case for cashing in on a proportion of the value growth that has taken place in the plc is strong.

The second part of the equation is the cost of the new farm, or in this case Dairy Ireland. The 60% shareholding will cost the co-op €112m for a business that in 2016 returned a profit of €30.7m on sales of €616m. On the surface it appears good value, but there is always the risk that the 2016 performance – or indeed the five-year average profit figure – does not reflect future performance.

There is also the risk of missing out on further value growth in the plc if the shareholding is diluted.

This is where appetite for risk comes in. Glanbia plc – like the apartment block – could continue to break new ground in terms of market value, but of course in such a scenario farmers, through their co-op shareholding and individual plc shareholding, would continue to benefit most.

In the context of the risk, it is worth highlighting that since the announcement of the proposal, the plc share price has increased by €1.40, effectively increasing the value of the co-op shareholding by €148m. However, like the property market, there is a risk of market value falling from the current high. Reducing the plc shareholding to invest in another business diversifies the risk profile.

Meanwhile, the merits of reducing a shareholding in an asset that has delivered phenomenal growth to acquire one with lower returns should be assessed against investment goals and identifying what is core. Going back to the farmer with the apartment block in Dublin, the decision to sell one apartment to buy another farm only makes sense if growing the farm business is seen as core.

So, the question for Glanbia farmers is do they see releasing 3% equity in what is now effectively a global nutrition business to secure a controlling stake in an Irish consumer foods and agribusiness as strengthening their core?

Of course, the alternative option is that the co-op could simply acquire 100% of GII and take full ownership of the milk processing facility. The question here is do farmers see value in the joint venture model which brings with it the benefit of strict management principles and global opportunities that the market reach of the plc could create? There is no doubt that these strict management principles will be required for the model to deliver a 3.2% operating margin at the same time as delivering a strong milk price.

In any negotiation, there is always the hunger to secure more and the worry that an opportunity may be missed. At some point it comes down to assessing the deal on the table and asking if it makes sense and is there a balance between risk and reward.

The proposal is likely to tick both boxes for the majority of those travelling to Punchestown next week.