Given the news that LacPatrick is exploring its future options, co-op members will be looking to what value is in the cross border co-op.

Putting a value on a co-op is somewhat different to other businesses. In any other company structure, the business is valued at a multiple of profits, margins, growth potential and sector.

For example, agri-food businesses can make seven to eight times earnings, with higher-margin, higher-growth nutrition businesses making upwards of 15 to 20 times earnings.

So an agribusiness with earnings (EBITDA) of €9m could be valued at around €60m.

With co-operatives, rarely is there a cash offer made that pays a sum of money to its members for the business. This is due to the ownership structure and the co-op ethos.

The very existence of a co-op is that it is there to serve its members. The members benefit from the co-operative pursuing its objectives and delivering services to its members. The members benefit either because they can acquire these services at the best price or because the service would not be otherwise available.

In the case of LacPatrick, the co-op processes its members’ milk.

A co-op share does not represent a share in the underlying asset value of the co-op. For example, a co-op with a face value per share of €1, and 5m shares on offer and net assets of €50m, the see through value per share is actually €10.

On winding up, a co-op’s constitution may provide for a distribution of capital to members if there is a surplus. The fixed share value, lack of capital gain and the restriction of selling only to members, means that it is difficult or rare for a co-operative to be taken over by another entity.

Negotiations therefore usually centre on “mergers” in the broadest sense of the word. Technically while they are mergers, history tells us they usually come from a position of weakness and usually feature an approach made by a stronger co-op to a weaker co-op. Members then get shares in the enlarged co-op.

For LacPatrick, interested co-ops will be looking at what value is in any deal. The boards of any likely suitor will be looking at the following:

Milk pool

The LacPatrick milk pool is attractive to any co-op with growth ambitions. While LacPatrick claims 500m litres in the North and 100m litres in the south, it may be closer to 350m litres in the North. The overall milk pool would bring scale, efficiencies and synergies to any processor. There is a risk of supply slippage if some members don’t fully back a merger deal.

Products and customers

LacPatrick has over 30 years’ experience in the production of a wide range of milk powders, produced at Artigarvan. It produces 30,000t of powders for export.

Its LP brand has an excellent reputation for quality and is particularly strong in west Africa. It has gained international recognition for its properties and functionality.

LacPatrick makes over 30,000t of butter each year selling it through its own brand and private label. This would be of interest to other processors. However, volumes may be lost to competitors following any deal as retailers may prefer to deal with many suppliers. It also has a texturised butter product.

The infant formula manufacturer Abbott will interest other processors as a valuable customer.

Investments and plant

LacPatrick has well-invested plants – Artigarvan has just completed a €40m investment in a new 7t/hour drier, while Ballyrashane invested €9m in 2014 in a new technical butter plant. It also invested €3m in an anaerobic digester a number of years ago at this site.

Debt and finances

There is no visibility of the 2017 financials or current debt position at LacPatrick. When it took on the debts of Ballyrashane, Town of Monaghan was in a net cash position. Given the significant investments around the drier, it is likely net debt has increased significantly over the past two years. It also had a shareholding in Aryzta, which was worth €23m a number of years ago. These shares have fallen in recent years.

Fit with strategy

Prospective co-ops looking at LacPatrick will look at a fit within their own strategy. For some it may be a distraction, for some there will be synergies and opportunities.

  • Next week, we look at how previous mergers have taken place.