A proposal has been announced this week for Glanbia Co-op to take full ownership of Glanbia Ireland by purchasing Glanbia plc’s 40% stake in Glanbia Ireland.

The deal has been in the pipeline ever since Glanbia shareholders voted to create the joint venture called Glanbia Ireland.

If approved, it essentially means that Glanbia Ireland will be 100% owned by Glanbia Co-op and becomes a fully independent co-op, not linked to any other commitments of Glanbia plc. If successful, both Glanbia Ireland and Glanbia Co-op will trade under a new name.

What will it cost to do this? The price tag is €307m. However, if you allow for €8m in transactional costs, which the plc will carry, and circa €14m of a dividend that Glanbia Ireland is not required to pay to the plc for 2021, the price tag could be described as closer to €285m.

The proposal is that up to 50% of the price tag for the proposed transaction will be funded by the co-op through the sale of shares in Glanbia plc (estimated at approximately 11.5 million shares), with the balance to be funded through borrowings.

The proposed deal also includes a €168m spin-out of plc shares to co-op members. Based on the Glanbia plc’s closing share price of €13.98 on 9 November 2021, according to the co-op this would be worth approximately €168m, or €11,028 for a member with an average shareholding. This will vary a lot between the 11,200 shareholders. The average milk supplier has about 4,000 shares, but again this will vary within regions of the Glanbia catchment area.

The proposal carries potential benefits to both parties. The plc will get a pot of money for potential acquisitions in higher-margin businesses.

The co-op gets more flexibility in how it makes returns to its milk suppliers and grain growers and funding to invest in higher margin business.

Investment fund

The potential funding of a new investment for Glanbia Co-op will come from the creation of an Investment Fund, which will be available to pursue new opportunities for the co-op. There is no mention in the proposed deal of any immediate acquisitions.

This fund will be activated, when required, at a future date through the placement of up to 12 million Glanbia plc shares (value of €168m at current share price).

However, for the moment the intention is that this fund remains sitting with the plc earning a dividend.

Glanbia plc share price opened at €14.30 on Wednesday morning and dropped to €13.90 by midday on Wednesday as news of the deal was announced

What it means for the plc

If all is approved the co-op will sell down three chunks of shares; (1) 4% to fund part of cash payment for deal; (2) 4% to fund the spin out to shareholders, and, (3) 4% to create an investment fund for the new entity. At the forthcoming Special General Meeting (SGM), the co-op board will also seek to retain the existing 3% contingency or in other words set a minimum threshold of 17% for the co-op shareholding in the plc.

Timing

The plan was discussed at the Glanbia Council yesterday and will be discussed at a combined outer board meeting on Friday. If possible the co-op will then hold a virtual special general meeting (SGM) in December if it can be arranged. The virtual SGM may go to January depending on logistics etc.

Q&A

Jack Kennedy talks to Glanbia Co-op chair John Murphy and Glanbia chief agribusiness growth officer Sean Molloy

Jack Kennedy: Why do this and why now?

John Murphy: Why – because of farmers’ ambition to pay the strongest milk and grain price possible and for Glanbia Ireland’s ambition to be a leading food company. We want to be able to invest in higher-margin business. We carried out a strategic review and our board are unanimous that to take full control of the business brings flexibility in what we can do for suppliers. Relationship with the plc is strong and the time has come to do this deal. Over €559m investment has taken place since 2012 and we were always going to arrive at this day at some stage.

How did you arrive at a price of €307m? The speculation ranged from €600m to €185m.

Sean Molloy: We were very minded to work with external advisers and so engaged KPMG last August. KPMG, Jim Bergin and myself have been working with the board since then to frame strategy. Siobhan Talbot and Michael Horan stepped back from any discussions on the deal since then. In terms of the value, KPMG has access to all the data and the value of €307m for the assets acquired was established. Since 2012, there has been huge investment to allow for the expansion of milk in the catchment and develop the market. If approved, the €14m dividend to the plc is allowed to stay with the new organisation and the €8m in transactional fees will be covered by the plc. So hence €285m is closer to the mark. We will own a €2bn revenue business with about €123m of earnings in 2020 if approved.

Will the KPMG analysis be published?

JM: The board have engaged comprehensively with KPMG and are satisfied that every avenue and stone has been overturned. Enough information will be provided over coming weeks to show how the board and the plc have arrived at this decision.

Is it right the co-op will have full control over milk processing and the Glanbia agribusinesses and is there a plan for acquisition in Ireland or the US or why the investment fund? Can the fund be used for other purposes?

JM: Yes all the milk processing and feed input business will be in full control of the new entity. The investment fund will allow for expansion and the next 10 years of adding value. I don’t think we would invest in a primary dairy business and I don’t think the plc has other assets the co-op would be interested in.

Assuming the deal goes ahead, what sort of financial health will Glanbia Ireland be in post-deal? and why were the funding options chosen? Is the spin-out really necessary?

JM: We’ve done other spin-outs at various intervals and the company is really well invested with €1bn of investment in the plc and a potential investment fund of €170m so I think it is important that farmers benefit and we distribute value back to farmers.

SM: We are fortunate to have a strong financial business and we have learned plc disciplines and that won’t change. We have had a lot of robust debate in the board room and we have a strong relationship with the plc so to have an 8% conversion spin-out and yet retain 24% shareholding in the plc with a potential option to move to a 20% shareholding if required. Yes, we could have borrowed bigger but that’s a judgement call.

What changes will there be to Glanbia Ireland board now as a result?

JM: The plc directors drop off the Glanbia Ireland board and we will appoint some new directors that will bring some merger and acquisition experience or experience in brands, all of which is subject to the normal shareholder approval, but that’s what I’d like to do if successful.

What changes to management?

SM: Jim Bergin has been appointed CEO by Glanbia Co-op and Siobhan steps back from involvement with Glanbia Ireland.

How do you expect grain or dry shareholders to view this deal?

JM: We have over 5,000 dairy farmers and close to 1,000 grain growers and this new structure allows us to have an ambition to pay the highest possible price for milk and grain. As chair, I’m ambitious and our board are equally ambitious for family farms to grow family businesses. I think it’s a very positive piece and they will look on it favourably and it’s a decent spin-out and will also include a progressive and growing dividend.

How will ‘the highest possible price’ be measured?

JM: Any measurement must be fair and transparent and we will work with the industry to establish that.

When you say increased flexibility in what you return to suppliers, what do you mean?

JM: The 3.2% threshold for profit after tax is gone and the company doesn’t have to run to any one number in any year. The investment fund would allow opportunity to invest in higher-value returns. One single focus should help deliver a better milk price in the longer term.

Any tie up or commitments with plc?

SM: We have some shared IT services and some commercial agreements as it stands. We have agreed to continue to provide the IT and corporate arrangement for the next three years. On the commercial agreement, the plc is obviously a very valued and important customer, especially for whey, but there is no preferential treatment of the plc as a customer planned on price or volume.

What are the tax implications of the spin-out for farmers?

SM: This is a matter for the individual farmers. If approved realistically this will be a mid-2022 deal before signed off.

You seem very positive on this deal?

JM: We have gone through a very robust valuation exercise. The 14 farmer directors have left nothing on the table. If successful we will own 100% of a business that had earnings of €123m in 2020 that we can buy for a multiple of 3.5. It works for both parties.