Exclusive: Kerry Co-op to be liquidated as part of JV deal with Kerry Group

Kerry Group is set to offer farmer members of Kerry Co-op the opportunity to buy a 60% majority stake in the company’s primary dairy business with a further option to buy the remaining shares in the business over time, the Irish Farmers Journal can reveal.

In what would be a historic move, farmer members of Kerry Co-op will be asked to invest to become majority shareholders in a joint venture business that would be very similar in nature to the ownership structure of Glanbia Ireland.

The proposal, which is complex and has a number of interlinked parts, will mean the end of Kerry Co-op as we know it. Under this proposal – the co-op, which was first founded in 1974 – will be liquidated and shares will be spun out to all shareholders.

Milk suppliers will be asked to reinvest in a new co-op that will buy the 60% stake in Kerry Group’s primary dairy business, while dry shareholders (non-milk suppliers) will be given shares in Kerry Group, which will be treated under capital gains tax.

It’s understood the Revenue Commission is on board with this plan and is eager to see the co-op wound up given the numerous issues Kerry Co-op shares have created over recent years.

Former Kerry Group chief financial officer Brian Mehigan has led the negotiations on behalf of Kerry Group since last September. However, the Irish Farmers Journal understands that Kerry Group CEO Edmond Scanlon, along with Kerry’s head of acquisitions and disposals Gavin Caplis, are now involved in the process with due diligence of the proposal almost complete.

The Irish Farmers Journal understands the full details of this proposal will be put to the board of Kerry Co-op when it holds its next meeting in early August.

How will it work?

Under the terms of the proposal, milk suppliers to Kerry will become the majority shareholder of Kerry Group’s primary dairy business but will have an option to purchase the remaining shares in the business over time.

It’s understood Kerry Group has valued its primary dairy business at €1bn, meaning the cost of acquiring the initial 60% majority stake in the business would be north of €600m for Kerry Co-op milk suppliers.

However, it’s thought that Kerry Group will offer the 60% stake in its primary dairy business at a discounted value given the shared heritage of the co-op and the plc.

How will farmers pay for this?

The biggest question facing this potential joint venture is, how will it be funded? The Irish Farmers Journal understands the proposal will be funded through a combination of the co-op selling shares in Kerry Group along with a loan, which milk suppliers will have to repay over time.

No official details have emerged but there are suggestions the cost of the transaction could be close to €280m, with the co-op financing €180m through share sales and a €100m loan to be repaid by farmers.

Kerry Co-op currently has almost €50m in cash reserves. However, its main asset is the 12.7% stake it holds in Kerry Group plc, which is valued at €2.4bn based on Kerry’s share price this week.

Currently, a single share in Kerry Co-op equates to 6.12 Kerry Group shares

The co-op will have to spin out a significant volume of these shares in Kerry Group plc to its dry shareholders but it is likely it will also retain enough to fund the investment on behalf of its milk suppliers.

It’s understood there will be a haircut on the ratio of co-op shares to Kerry Group shares as part of this.

Currently, a single share in Kerry Co-op equates to 6.12 Kerry Group shares. By reducing this ratio down to around 5.7, the co-op will hold on to a significant volume of Kerry Group shares which it can use to part-fund the joint venture proposal.

Farmers will be given shares in a new co-op for Kerry milk suppliers that will control the majority stake in Kerry Group’s primary dairy business

Understandably, this may attract resistance from dry shareholders who will not want their shares diluted to fund an investment in milk processing. On the other hand, the capital gains scheme is something dry shareholders have long called for in Kerry Co-op.

Alongside this, milk suppliers will then be asked to invest via a loan that could be repaid out of their milk cheques over time. Farmers will be given shares in a new co-op for Kerry milk suppliers that will control the majority stake in Kerry Group’s primary dairy business. Importantly, this will be a farmer-only co-op.

Retiring milk suppliers will be able to redeem their shares in this new co-op in order to avoid the complications created in the past with Kerry Co-op shares.

Ironically, this format is very similar to what was first used to establish Kerry Co-op in the early 1970s. In order to secure approval for the proposal, Kerry Group is set to throw in a number of sweeteners for farmers.

A further goodwill payment is expected similar to the January top-up of 3c/l.

On top of this, a new, clear formula is to be agreed for setting milk price that will remove the contentious “leading milk price” clause but will see Kerry farmers receive one of the highest milk prices in the country on a like-for-like basis.

It’s understood the joint venture business will include Kerry’s three Irish milk processing facilities in Charleville, Newmarket and Listowel, but could also include its dairy spreads manufacturing site in west Yorkshire. Enticingly for farmers, the Irish Farmers Journal understands the proposal would include a number of added-value aspects of Kerry Group’s business including its infant formula business in Charleville as well as its range of well-established dairy brands such as Cheesestrings, Dairygold, Low Low, Charleville Cheese and Golden Cow.

In total, Kerry processes about 1.2bn litres of milk every year making it one of the “big four’”milk processors in the country.

The main dairy products produced by the three sites in Ireland are casein and cheddar. Indeed, about one-third of all the milk collected by Kerry Group is processed into rennet casein, making it one of the largest casein producers in the world. Another one-third of Kerry’s milk supply is used to produce up to 40,000t of cheddar every year.

The joint venture proposal would also include Kerry Group’s agri-trading business

The whey left over from making cheese and casein is then further processed into demineralised whey, which Kerry Group uses in its own infant formula plant in Charleville but also sells to infant formula companies in Europe and Asia.

The final third of Kerry’s milk pool is used for skimmed milk powder (SMP) and a range of high-value specialised protein ingredients.

The joint venture proposal would also include Kerry Group’s agri-trading business, which comprises its animal feed mill in Farranfore and the network of agri-stores.

The current negotiations between Kerry Group and Kerry Co-op were sparked in September last year following an arbitration ruling on the contentious “leading milk price” issue that has dogged both sides for years.

In his ruling, the arbitrator said the four west Cork co-ops should be included when determining the “leading milk price”, which is enshrined in the most recent milk supply agreement between Kerry Group and its milk suppliers.

For Kerry Group, the “leading milk price” contract is seen as a major problem, especially when no farmers are actively involved in the decision-making process for setting the monthly milk price.

At the moment, farmer members of Kerry Co-op don’t have any say in setting Kerry Group’s milk price as the co-op is not involved in milk processing. Instead, it is merely an investment vehicle which holds shares in Kerry Group on behalf of its members.

For Kerry Group, the proposal would help them draw a line under the difficult leading milk price issue

By agreeing a joint venture, this would bring farmers back into the decision-making process for setting milk prices. It would also mean farmers will have a financial responsibility to set a milk price that didn’t jeopardise the finances of a business they are majority shareholders in.

At the same, this proposal would allow for the liquidation of Kerry Co-op in its current form and solve its numerous issues with Revenue over how the co-op shares are valued, traded and taxed.

For Kerry Group, the proposal would help them draw a line under the difficult leading milk price issue. At the same time, it would also allow the group to realise a significant cash windfall from one of the lower margin areas of its global business.

If Kerry Group were to get a significant cash payout for selling a 60% stake in its primary dairy business to Kerry Co-op, it could then reinvest this money into more higher-margin, value-added parts of its enormous flavours and nutrition business.