Ornua has sold an 80% stake in its US distribution business, DPI Specialty Foods, to Arbor Investments, a private equity firm based in Chicago that focuses exclusively on acquiring companies in the food and beverage area.

Ornua will maintain a 20% shareholding in the business, with no intention at this stage to reduce this further. As part of the deal, Ornua will retain one seat on the board (out of a total of six) and DPI’s existing senior management will continue to lead the organisation.

The gain on disposal will be in the region of €30m and the proceeds will be used to reduce net debt, which was €99m at year end last December. It is expected that net debt will be significantly reduced at year end despite having invested in working capital and capital expenditure during the year.

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This would also indicate that Ornua has firepower to make further investments and/or acquisitions in the near term.

Why own a logistics business?

DPI was purchased in the 1980s by the Irish Dairy Board to help the Kerrygold brand of butter and cheese enter and penetrate the US market. When the brand entered the US in 1987, it was virtually unknown and the US speciality food market, although extremely large, was highly fragmented.

The US retail grocery market was similarly structured, with the top four retailers accounting for about 50% of sales. Against this market structure, it was seen as a strategic investment that would aid the brand’s growth.

But DPI has had a chequered past, heightened by the economic recession and financial crisis as consumers limited their spending on specialty food products. DPI had become the third-largest distributor of speciality food to the retail sector and the expansion of private label brands in speciality categories impacted performance.

Coupled to this, the competitive landscape changed in 2010 when two of the four largest distribution players in the US merged, creating increased competition reducing margins.

In response, the business reorganised and the new structure positioned DPI to be more aggressive in expanding its business. After an €8m investment in facilities since 2012, the business turned a corner. A partnership with Starbucks proved to be extremely valuable, and the number of stores serviced grew over the years. Today, DPI supplies over 40,000 SKUs to the retail sector across the US.

Impact on Ornua

Last year, DPI contributed to the overall Ornua business, although a breakdown of the profitability is not available. Turnover increased 9% to €730.1m in 2014 and it accounted for 31% of Ornua’s overall business (€2.34bn). But while it contributed significantly to Ornua’s top line, it had become non-core.

Over the past 25 years, Kerrygold has grown from strength to strength – today the number three butter in the US and the number one imported butter.

Only a very small percentage of Kerrygold sales go through DPI as Ornua has built up direct relationships to sell the Kerrygold brand with major retailers such as Walmart, Costco, and Wholefoods. However, Ornua will continue to work with DPI as one of the key distribution partners for Kerrygold into the smaller retailers across the US.

While it had its role in the past and at times may not have contributed to the bottom line, it significantly helped establish the Kerrygold brands in the US.

This in itself is remarkable and Kerrygold will reap the benefits long into the future. The sale is consistent also with Ornua’s strategy of reallocating capital and assets to support Ornua’s growth to invest and deliver new routes to market for Irish dairy products.