The request of Glanbia Co-op shareholders for the vote on 17 December is much bigger and more complex than simply approving the resolution to acquire Glanbia plc’s 40% interest in Glanbia Ireland. If that was the extent of the vote, the decision would be straightforward.

Most accept that, in relation to the valuation of the shareholding, the board and management of the co-op struck a balanced and strategically important deal with the plc. The success of the acquisition will depend on the capacity of board and management to develop and execute a strategic plan for the business that will maximise value for shareholders.

Special general meeting

Last week, both the co-op and the plc confirmed that the €307m deal was not dependent on the co-op selling its shareholding in the plc – appearing to come in response to a slide in share price since the deal was announced in early November. However, the construct of the special general meeting (SGM) and the resolutions being put forward effectively tie shareholders’ hands.

Five of the six resolutions being put to shareholders are interdependent, meaning that the co-op will not proceed with the proposed transaction if each of these resolutions are not approved by the required majorities. In this context, the deal to acquire the plc’s shareholding in GI is contingent on shareholders giving the co-op board permission to significantly reduce their shareholding in the plc.

Strategic move

It is clearly a strategic move by the board. There was no requirement to put resolutions relating to a 40% reduction in the co-op’s shareholding in the plc to shareholders at the same time as a resolution to approve the GI transaction was being voted on. The need for the associated resolutions to be interdependent is also unclear given that this rule does not apply to all of the resolutions being put forward to shareholders next week.

Therefore, the vote next week has been constructed in a way that if members want to acquire 100% ownership of GI, they must agree to allow the co-op board the scope to reduce the shareholding in the plc by up to 40% – from the current threshold of 28% to 17%. To do so will require shareholders to place a huge level of trust in a board and management team that, as Jack Kennedy highlights in this week's edition, have historically failed to meet farmers’ expectations on milk price – albeit acknowledging the constraints of delivering a 3.2% PAT margin and facilitating rapid expansion of the milk pool.

Glanbia Co-op chief executive Jim Bergin with co-op chair John Murphy. \ Mary Browne

Some also point to the fact that the initial focus of management should be on ensuring that the dairy processing business, which will have significant levels of debt, quickly starts returning value back to shareholders. There is a concern that the establishment of a mergers and acquisitions (M&A) fund at the same time as taking on such a major acquisition could distract management from focusing on the core business.

Unease has also been expressed as to the lack of commitment from the board and management to the delivery of key benchmarks and business milestones for the new dairy processing structure.

Legitimate concerns

These are all legitimate concerns that shareholders are right to raise at this stage. Giving a board permission to wind down a shareholding in a successful plc to embark on what is yet an undefined M&A trail is arguably an extremely high-risk strategy – only amplified by the fact that it is being sought in tandem with permission to acquire 100% of GI.

We should not look past the fact that the vast majority of M&A activity does not end in success and that the road to revenue diversification is littered with casualties. We only have to look to the huge challenges Fonterra faced on its M&A journey and the extent to which it has retrenched back to its core in recent years. Greencore is another such casualty within the food sector.

Shareholder concerns

Ultimately, the onus is now on the board to address these concerns in the days ahead. They must be in a position to convince shareholders that they are deserving of the huge level of trust that they are asking for and have the capacity to mitigate the embedded risks attached to an M&A strategy – not least a distraction from the core business.

Providing more clarity around key milestones for the new dairy processing business and assuring shareholders that M&A activity will be dependent on management achieving these key milestones would appear to be absolutely critical in advance of an SGM taking place. If providing this information and reassurances within the remaining timeframe is not possible, then the vote should be postponed until it can be fully debated and assessed.