Long way to go on Kerry joint venture talks

Kerry Group CEO Edmond Scanlon says ongoing joint venture talks with Kerry Co-op still have a long way to go and may run into the second half of this year.

Speaking to investors and analysts this week following the release of Kerry Group’s annual results for 2020, Scanlon said negotiations with Kerry Co-op are still at a very early stage and agreeing a deal is not guaranteed.

When pressed on more details about the primary dairy business, Scanlon said the business had annual revenues of about €900m, with about 50% of sales coming from consumer foods products (butter spreads, Cheesestrings, dairy brands etc.) and the remaining 50% of sales coming from dairy ingredients and commodities.

On the profits of the business, Scanlon gave no firm detail but said the profit margins in the primary dairy business are “much lower” than the profit margins in the wider Kerry Group.

However, the Kerry Group boss did say there is a mix of profitability across the dairy business with profit margins on consumer dairy products higher than the profit margins in commodity dairy ingredients.

Based on Scanlon’s comments, it’s likely that Kerry’s dairy business has single digit profit margins in the region of 5% to 9%. This would mean the business generates annual profits of €45m to €80m depending on the margin.

While there was no official announcement at the time, it’s now public knowledge that Kerry Co-op submitted an offer of about €480m back in January to buy a 60% majority stake in Kerry Group’s primary dairy business.

It’s understood Kerry Co-op and Kerry Group are now engaged in a process of due diligence, where Kerry Co-op will be given access to detailed financial accounts for the primary dairy business for the first time.

Edmond Scanlon’s comments that the joint venture talks are likely to run into the second half of this year makes sense given the number of issues yet to be resolved. Leaving aside the value of the transaction, this joint venture is shaping up to be one of the most complex deals done by any company this year.

Due diligence

Once the process of due diligence is complete and a final valuation of the business is agreed on, Kerry Co-op will then need to set out how it plans to fund this transaction, which is where things are set to get tricky. This is due to the presence of three distinct shareholder groups in the co-op (milk suppliers, retired milk suppliers and non-farming shareholders) all seeking very different outcomes from these talks.

My belief is that once due diligence is complete and the valuation is agreed, Kerry Group will give Kerry Co-op the time and space it needs to begin consulting its shareholders to explain the finer details of this deal and sound out the most suitable funding strategy.

A combination of selling Kerry Group shares, farmers being asked to share up and a small level of debt looks like the most obvious option.

Leading milk price

Of course, the contentious leading milk price issue continues to hang over the talks and this will need to be resolved before many farmers can take the leap of faith on this deal.

The Irish Farmers Journal understands discussions between Kerry Group and Kerry Co-op on the leading milk price are taking place parallel to the joint venture negotiations and agreements on milk price top-ups for 2019 and 2020 are said to be close.

There are still a lot of hurdles to be crossed in these talks, but if agreement can be reached on the valuation of the business, the funding model and the leading milk price, then it’s possible a vote of A and B shareholders in Kerry Co-op could be held some time in the summer.

Alternatively, Kerry Co-op may want to hold off until September or October if it wishes to hold a shareholder vote in person, depending on the rollout of the COVID-19 vaccine over the coming months. Either way, a major drive will be needed to sell this deal to farmers and non-farming shareholders alike.

Technically, the rules of Kerry Co-op allow the board to sanction this joint venture without a shareholder vote. However, given the significance of any deal, it’s very difficult to see how the board could bypass a shareholder vote.

Information

In the meantime, Kerry Co-op needs to start communicating with shareholders about where things stand. The one thing that has been very clear from the outset is that Kerry milk suppliers and shareholders are crying out for information of some kind from the leadership of Kerry Co-op.

Edmond Scanlon’s comments this week are a start, but there remains a significant information vacuum about many aspects of the deal.

While it’s understandable that Kerry Co-op cannot divulge sensitive information, there is no reason why the co-op cannot begin to engage with shareholders about potential funding options.

There’s still a long way to go on these talks for Kerry Co-op. Keeping its shareholders in the loop, even on a limited basis, will make this very complex joint venture a lot easier to sell when it comes to a vote down the line.