Fane Valley Dairies acquired by Lakeland

Last weekend brought the end of an era for Fane Valley Co-operative as the society set up in 1903 ceased its involvement in milk processing.

With effect from 1 May, the business of Fane Valley Dairies has been acquired by Lakeland Dairies Co-op. This deal replaces the strategic joint ventures announced last August, under which it was proposed that two separate mergers would bring together the dairy and agricultural supplies businesses of the two co-ops without any cash payment. Both joint ventures have been dropped.

After nine months of negotiations, the decision announced this week is that the “simplified deal structure is considered to be a better option”. Lakeland chief executive Michael Hanley spoke positively about the courage of the boards of both co-ops to adapt and revise their approach.

Fane Valley chief executive Trevor Lockhart said that the two co-ops remain absolutely convinced that the interests of their milk suppliers will be better served in a combined business, which can deliver greater economies of scale and enhanced market capability.

Dairy accounted for just under 20% of the Fane Valley Group turnover of £553m (€700m) in the last published accounts for the year to September 2014.

The Fane Valley milk pool is around 250m litres, sourced from suppliers averaging over 1m litres per year and producing all year round. The enlarged Lakeland business will now process close to 1.2bn litres of milk, with about half of this produced in Northern Ireland.

With substantial sales of dairy products into the food service market in the UK, Lakeland is well placed to hedge its currency exchange rate risks.

The acquisition also gives Lakeland cover against the risk of issues that might prevent cross-border movement of milk, such as what happened during the foot and mouth disease crisis or if Northern Ireland ceases to be part of the EU due to a Brexit.

Losses

The business of Fane Valley Dairies was incorporated in Armaghdown Creameries Ltd, for which the most recent published accounts indicate a loss of £1.13m (€1.4m) on record turnover of £106.3m (€134m) during the year to 30 September 2014. This loss was after an exceptional write-down of £1.67m (€2.1m) in the value of stock items at the year end, with notes to the accounts indicating that “milk powder sales fell dramatically” in the fourth quarter. It’s believed that substantial further losses have been sustained in the period since September 2014.

The Armaghdown business, based at Banbridge in Co Down, had been a major profit generator for Fane Valley for decades but gross profit margin in 2014 was down to 0.6% from 2.7% in 2013. That previous year showed a post-tax profit of £0.72m (€0.9m) on sales of £92m (€116m).

The Fane Valley Dairies business has been rationalised over recent years, withdrawing from liquid milk, packet butter and various retail-orientated lines on three different sites to concentrate production at just the Banbridge factory, which manufactures milk powders, bulk butter and butter oils.

Much of this product goes for sale in Africa, Asia and South America. There are two driers on site, using natural gas energy, with capacity to produce around 31,000t of milk powder per year.

Fane Valley Group

Other parts of the Fane Valley Group, including two feed mills, beef and lamb processing, animal by-products and fat processing, oat milling and retailing of farm supplies, are not involved in the deal. These account for over £450m (€570m) of sales turnover, including its subsidiary Linden Foods and its 50% share of Slaney Foods.

The ABP Group recently announced a deal to acquire the other 50% share of the Slaney Foods joint venture from the Allen family which would make it an equal partner with Linden in the Slaney business. That proposed transaction is currently subject to scrutiny by national competition authorities and the EU body responsible for control of mergers.

Fane Valley Feeds, with mills in Omagh and Newry, is the second-largest feed manufacturer in Northern Ireland, with capacity to produce over 310,000t per year. Fane Valley Stores is the largest retail distributor of animal health and farm supplies in NI, with 13 outlets around the North.

The Group accounts for the year ended 30 September 2014 reported a pre-tax profit of £6.8m (€8.6m), down from £8.7m the previous year. However, this included an exceptional item of £4.7m (€5.9m), mainly profit on sale of the former headquarters of the co-op in Armagh.