In October 2017, Kerry Co-op appointed Thomas Hunter McGowan as executive secretary/CFO. This is the first time in 31 years that the co-op employed an executive – a role traditionally taken by the CEO of Kerry Group plc.

Hunter McGowan’s appointment comes at a critical time for the co-op (which holds a 13.7% share of Kerry Group plc) as it awaits results of a test appeal case relating to Revenue, while also trying to win back its status which allows it to spin out shares in Kerry Group plc to its member’s tax-free. And then there is the separate and equally important arbitration case between Kerry Co-op and Kerry Group over the so-called “thirteenth payment”.

In 2017, the board of Kerry co-op laid out three key principals of equal importance for the future of the co-op. They are as follows: Kerry Co-op should continue as an entity; the co-op should be relevant to its members; create liquidity in its shares.

However, before these principles can be developed, Kerry Co-op has to overcome the not insignificant issues it has with the Revenue Commissioners. While independent of each other, all the issues facing the co-op today are in their own way intertwined and unravelling a solution is not going to be straightforward.

Issue one

Patronage shares

Revenue first issued letters to 400 Kerry Co-op farmers in 2016 stating that patronage shares issued to them from 2011 to 2013 were deemed as trading income subject to income tax, based on their market value when received. These patronage shares were issued based on the quantity of milk supplied by the co-op shareholder.

“The core of Revenue’s argument was that the patronage shares were issued as a partial payment for milk, which Kerry Co-op insists they were not,” says Hunter McGowan. “These shares were a capital item and are not trading income. Kerry Co-op chose to use litres of milk supplied as a method to distribute the shares as it was the easiest to apply and the best understood by farmer members. But we could easily have based it on acres of land farmed. There was certainly no attempt to link the share to milk price,” he added.

In November last year, Kerry Co-op presented its case to the Tax Appeals Commission. “I think we will have a determination on our appeal by the end of the year,” said McGowan.

Issue two

Share spin-outs

Last week, shareholders in Kerry Co-op received a letter enclosed with a document from tax advisory firm Deloitte outlining the co-op’s tax position in relation to future share spin outs.

To date, Kerry Co-op has spun out shares from Kerry Group plc to its shareholders on six occasions. On each of these occasions, co-op shareholders qualified for a tax relief on the shares received under section 701 of the Taxes Consolidation Act 1997. However, section 701 was amended in 2012 where a co-op could only qualify for future tax reliefs provided more than 50% of the co-op’s members are involved in farming and derive their principal income from farming; ie the majority must be active farmers.

“Looking at Kerry Co-op’s shareholder profile today, it’s very obvious we wouldn’t pass the 50% test,” says Hunter McGowan. “We estimate that just under 40% of our shareholders are active farmers today. According to Hunter McGowan, there has been a substantial increase in the number of C shareholders in recent years as active farmers transfer co-op shares to family members or beneficiaries. He says some shareholders have also sold a portion of their Kerry Co-op shares over the years to private investors, who are buying them on the possibility of making a return from future section 701 spin-outs.

The problem for Kerry Co-op is that there is currently no share redemption mechanism in place for shareholders to redeem their shares. Under the co-op rules, shareholders can trade their shares if they can find a buyer but Kerry Co-op does not provide a market for such activity.

In order to qualify for reliefs again, Kerry Co-op will likely need to alter the configuration of its shareholder profile via an extensive share buyback programme.

According to documents seen by the Irish Farmers Journal, a share buyback is likely to cost Kerry Co-op between €72m and €158m depending on the amount of C shares it buys back. Before Kerry Co-op can move ahead with such a buyback programme for C shares, Hunter McGowan says the co-op needs to take legal advice to ensure such a scheme is within co-op rules.

On top of this, revenue has required the co-op to carry out a fresh, detailed analysis of its 13,300 shareholders to ascertain exactly how many members are still actively farming in 2018 and how many are deemed non-farming.

“The last time this was carried out was in 2013. We worked with Kerry’s agribusiness division the last time and we will require their assistance again to carry out this analysis as they have a have good personal knowledge of active farmers on the ground,” he said.

The major regret for Kerry Co-op in this process around qualifying for section 701 status is that it could have been avoided. “Prior to 2012, there was a possibility of applying for a certificate for lifetime 701 status. The co-op never applied for the certificate and it’s unfortunate that it was missed. We wouldn’t be in this bind that we’re now in,” said Hunter McGowan.

Issue three

Future of Kerry Co-op

Hunter McGowan says the co-op board believes that in order to remain relevant to members the co-op must once again become a trading co-op with milk processing facilities. He says the Kerry Co-op board will write to its shareholders in the near future. He adds: “It’s very important that we get shareholder input on the co-op’s future strategy. “The board is not trying to plough on in any particular direction,” he adds. “They’re just trying to find the best solution for every shareholder out of this.”

At the moment, Kerry Co-op holds the option to buy certain assets from the agribusiness division of Kerry Group plc. These assets include 33 retail farm stores, an animal feed mill and the milk assembly business (milk collection and delivery service) but not Kerry Group’s milk processing business. If Kerry Co-op wishes to exercise this option, it must do so by January 2019 or it will expire.

“It would be remiss of the board not to evaluate this option,” says Hunter McGowan. “It’s been made clear to us by revenue that Kerry Co-op is not an agricultural co-op but is an investment holding company. And while the act does not say it has to be a trading co-op to qualify for section 701, Revenue has intimated that it would be helpful to our case.”

“If we got a mandate from members and Kerry Group were interested in talking to us about selling their milk processing assets then that would be of interest to us. But, equally, there are other processors as well that could be of interest to us also,” he said.

Thomas Hunter McGowan

  • Corporate secretary and chief financial officer of Kerry Co-op.
  • Experience:

  • 1998-2008: Swansea Cork Ferries Ltd (managing director for eight years).
  • 2008-2012: director of finance at Kildare County Council.
  • 2012-2017: CEO of InterTrade Ireland.