In 1986, the farmer shareholders of Kerry Co-op made a momentous decision that pioneered a world-first co-op/plc model that was radical and groundbreaking. It laid the foundations for decades of much-needed investment in processing and in that time has created significant wealth for all shareholders in the co-operative. The generation that now comprises the shareholder base in Kerry Co-op has another major decision to take on 16 December. This proposal is as profound as that taken nearly 40 years ago and I would argue as strongly now as I did then, that it should be fully supported.
In 1986, the farmer shareholders of Kerry Co-op made a momentous decision that pioneered a world-first co-op/plc model that was radical and groundbreaking. It laid the foundations for decades of much-needed investment in processing and in that time has created significant wealth for all shareholders in the co-operative.
The generation that now comprises the shareholder base in Kerry Co-op has another major decision to take on 16 December. This proposal is as profound as that taken nearly 40 years ago and I would argue as strongly now as I did then, that it should be fully supported.
To assess the transaction fully you must see it through the lens of each stakeholder:
For the farming shareholders in Kerry Co-op this transaction allows them to regain strategic control and ownership of assets that matter most to their farm output. All shareholders in Kerry Co-op will receive a significant financial reward in the form of valuable shares in Kerry plc if this proposal is voted through. This proposal releases value and, importantly, includes rewarding the so-called “dry” shareholders who have been patient investors for many years. For Kerry plc, this transaction allows it to divest of dairy, food and agri trading assets and devote those proceeds to building out further its global taste and flavourings footprint. For the management and employees of the businesses being acquired by the co-op, they know that the new owner is a long-term shareholder. Compare that with the possibility that these assets could be acquired by private equity or industrial investors who could prioritise asset-stripping or loading the business with excess debt. These factors form a key part of reviewing this proposal, but when judging deals of this type, I always focus a key part of the analysis on the valuation paid and received for the assets. Have the buyer and seller struck a price that is sensible and fair? Moreover, when a co-operative is involved, a lot of weight should be attached to how the financing of the deal is structured.
Farmer-owned co-ops should always work with moderate levels of debt because of their unique capital structure. Here are the factors that influenced my conclusion that this is a fair deal:
The absolute sum at which these assets are being valued (€500m) is lower than the muted consideration that was floated a number of years ago. In investment banking, we always look at the profit multiple at which any deal is completed and compare it with relevant peers. This deal is being done at a profit multiple of 7.5x, and sits in the middle of the range for similar assets transacted domestically and internationally in recent years. It is also similar to the multiple paid by Tirlán to acquire dairy assets from Glanbia plc.The deal is being done with relatively conservative levels of debt. That is being achieved by selling some shares owned by the co-op in the plc, back to the plc at market prices. In funding the deal, the co-op is utilising just 15% of its holding in plc shares to de-risk the transaction for the co-op. That leaves 85% of the plc holding to be fully released for co-op shareholders, ensuring real value of €1.4bn is transferred to all the co-op members.
A positive outcome will (a) release significant monetary value for all co-op shareholders, (b) give control of strategic processing assets back to the co-op and its farmer members, and (c) allow Kerry plc to grow its taste and ingredients business globally and create more value for all shareholders in the stockmarket listed group.
Joe Gill
Joe Gill is director of corporate broking with Goodbody Capital Markets and is an adjunct professor of Business in University College Cork. He was formerly chief economist of ICOS.
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