This week’s news that Kerry Co-op will table a €480m offer to buy 60% of Kerry Group’s dairy business leaves plenty of questions to be answered for farmers and shareholders.
While there’s still a long way to go before this transaction actually becomes a reality, dairy farmers and shareholders of Kerry Co-op have plenty of valid questions that need answering before they could be asked to support such a significant deal.
We outline the key questions that Kerry milk suppliers and non-farming co-op shareholders need answered before they can give this historic joint venture proposal their blessing.
Funding
The most immediate question facing the board of Kerry Co-op is how will this deal be funded? Will dairy farmers be asked to share-up to help fund the joint venture and how much of a haircut will dry shareholders be asked to take on the value of their co-op shares?Does the board of Kerry Co-op propose to raise debt to fund this transaction? Once a funding plan is agreed by the board, this needs to be openly communicated to shareholders so individuals can assess what impact it will have on their own situation or how much dairy farmers will need to invest if they are required to share-up to help fund the transaction.Valuation
Is this business correctly valued at €800m? This is a key question to be answered. The sums of money being talked about up to now are enormous. Farmers need to be absolutely confident they are paying a fair price for this majority stake that reflects an accurate valuation for the business. Milk price
The ultimate question that needs answering for Kerry milk suppliers is will this help improve their milk price? Given the sums of money being talked about here, Kerry Group plc will need to clearly demonstrate to the board of Kerry Co-op and its dairy farmer suppliers how this proposed joint venture will lead to higher milk prices.
Profitability and dividends
Profits, profits, profits – what is the underlying profitability from this, both in terms of EBITDA and operating profits? The co-op board needs to examine at least a five-year trend of these figures to get a proper understanding of the profitability of what they are being asked to invest in.Fixed profit margin - will this new joint venture be required to make a minimum profit margin similar to the Glanbia Ireland model? As we have seen from the Glanbia joint venture, the fixed margin of 3.2% is a major point of contention between farmers and Glanbia plc.Will this new joint venture pay a dividend to both shareholders? The board of Kerry Co-op will need to examine what sort of dividend expectations Kerry Group plc has from its 40% stake in the joint venture. Paying too high a dividend could draw on cash and impact the business's ability to pay a higher milk price.Dry shareholders (non-dairy farmers)
If dry shareholders choose to remain investors in the new entity, how will their shares be treated under tax rules? We have already seen how dry shareholders in Kerry Co-op have struggled to cash in their shares because of the punitive tax treatment of Kerry Co-op shares by Revenue. How much of a haircut are dry shareholders expected to take on the value of their co-op shares in order to fund this joint venture deal? Many shareholders have already said a haircut to 1 co-op equals 5.5 Kerry Group plc shares is the limit they are willing to go down to.Governance
Will a new fit-for-purpose governance structure be put in place at board level to oversee this new joint venture? The level of board oversight needed for a billion euro dairy business is much higher that what’s currently in place for Kerry Co-op, which is essentially an investment vehicle. Will experienced non-executive directors be recruited to the board of this new joint venture?Longer term
Finally, will there be an option in the years ahead for Kerry Co-op to buy out the remaining 40% owned by Kerry Group?
This week’s news that Kerry Co-op will table a €480m offer to buy 60% of Kerry Group’s dairy business leaves plenty of questions to be answered for farmers and shareholders.
While there’s still a long way to go before this transaction actually becomes a reality, dairy farmers and shareholders of Kerry Co-op have plenty of valid questions that need answering before they could be asked to support such a significant deal.
We outline the key questions that Kerry milk suppliers and non-farming co-op shareholders need answered before they can give this historic joint venture proposal their blessing.
Funding
The most immediate question facing the board of Kerry Co-op is how will this deal be funded? Will dairy farmers be asked to share-up to help fund the joint venture and how much of a haircut will dry shareholders be asked to take on the value of their co-op shares?Does the board of Kerry Co-op propose to raise debt to fund this transaction? Once a funding plan is agreed by the board, this needs to be openly communicated to shareholders so individuals can assess what impact it will have on their own situation or how much dairy farmers will need to invest if they are required to share-up to help fund the transaction.Valuation
Is this business correctly valued at €800m? This is a key question to be answered. The sums of money being talked about up to now are enormous. Farmers need to be absolutely confident they are paying a fair price for this majority stake that reflects an accurate valuation for the business. Milk price
The ultimate question that needs answering for Kerry milk suppliers is will this help improve their milk price? Given the sums of money being talked about here, Kerry Group plc will need to clearly demonstrate to the board of Kerry Co-op and its dairy farmer suppliers how this proposed joint venture will lead to higher milk prices.
Profitability and dividends
Profits, profits, profits – what is the underlying profitability from this, both in terms of EBITDA and operating profits? The co-op board needs to examine at least a five-year trend of these figures to get a proper understanding of the profitability of what they are being asked to invest in.Fixed profit margin - will this new joint venture be required to make a minimum profit margin similar to the Glanbia Ireland model? As we have seen from the Glanbia joint venture, the fixed margin of 3.2% is a major point of contention between farmers and Glanbia plc.Will this new joint venture pay a dividend to both shareholders? The board of Kerry Co-op will need to examine what sort of dividend expectations Kerry Group plc has from its 40% stake in the joint venture. Paying too high a dividend could draw on cash and impact the business's ability to pay a higher milk price.Dry shareholders (non-dairy farmers)
If dry shareholders choose to remain investors in the new entity, how will their shares be treated under tax rules? We have already seen how dry shareholders in Kerry Co-op have struggled to cash in their shares because of the punitive tax treatment of Kerry Co-op shares by Revenue. How much of a haircut are dry shareholders expected to take on the value of their co-op shares in order to fund this joint venture deal? Many shareholders have already said a haircut to 1 co-op equals 5.5 Kerry Group plc shares is the limit they are willing to go down to.Governance
Will a new fit-for-purpose governance structure be put in place at board level to oversee this new joint venture? The level of board oversight needed for a billion euro dairy business is much higher that what’s currently in place for Kerry Co-op, which is essentially an investment vehicle. Will experienced non-executive directors be recruited to the board of this new joint venture?Longer term
Finally, will there be an option in the years ahead for Kerry Co-op to buy out the remaining 40% owned by Kerry Group? 
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