Ballyrashane co-op in north Antrim is unique. It processes just 110m litres of milk from 100 suppliers. Fifty per cent of its volume goes into a heavily invested (€9m) state-of-the-art butter facility that makes texturised butter.

It boasts being a carbon-neutral site, through its €3.5m investment in an anaerobic digester. Demand continues to grow for its premium Ballyrashane butter as customers as far away as Japan cannot get enough of the high-quality butter. And it’s all down to the milk which has a TBC of under 11 thanks to the 15-mile radius for all supply.

Sitting in the board room of the oldest dairy co-op in Northern Ireland, I want to know why and what benefit this merger is for its milk suppliers.

Nigel Kemps explains that in simple terms, more throughput was required to extract economies of scale. That makes sense, the co-op made a small profit of €101,000 last year on turnover of €110m. It was a well-invested business, albeit of relatively small scale, but with low returns as it aimed to keep its milk price up.

But a more pressing issue was around supply. As cream is needed to make butter, it became the limiting factor. The irony is that it was rationalisation (Lakelands took over a Nestlé plant and Fivemiletown went to Glanbia) that began to limit the opportunities to buy milk (and cream) locally.

Town of Monaghan

Processing a total of 450m litres, which comes from 1,000 farmer suppliers, TMC was a much larger co-op. What makes TMC unique is that 75% of its milk was sourced from farmers in Northern Ireland.

Last year, the co-op recorded a loss of almost €2m on turnover of €205m due to exceptional items including significant provisions associated with business restructuring and milk pricing.

Approximately 40% of TMC’s packet butter business goes to the Kerrygold brand but this business had come under threat as Ornua invested in its own butter manufacturing facility.

TMC had a strong balance sheet, with no debt, €32m in cash at year end and a significant holding in Aryzta. So why did it need to look outside at all?

One of the key issues was its ability to process all the milk at peak volumes. Capacity investment was needed and it had the financial firepower but required additional volume to make the investment viable, according to Gabriel D’Arcy, who took over the top job nearly one year ago.

He added that TMC didn’t want to go down the route of becoming a commodity player, especially because of their lack of real scale.

Complementary

It was a chance meeting at a social event that led the two chief executives to explore options around the future of their respective co-ops. The proposal made sense. It had geographic and product logic. The proximity of Ballyrashane to the Artigarvan site meant cream could be supplied to Ballyrashane to make butter, which creates a lot of skim and this could be dried at Artigarvan.

Even though TMC was at capacity, an additional milk pool of 100 suppliers would give it the confidence to invest at scale to gain efficiencies. On the marketing side, it allowed for cross-selling, especially in export markets.

Following the chance meeting in October last year, both chief executives entered into an engagement and discussion period. It wasn’t long before they realised that this made sense from a business point of view. In fact, they both felt that the impact of not doing so would be more detrimental to each business and hence the farmer suppliers.

The two chairmen were then brought in. Information meetings were held with the two groups of shareholders and in a brave move, the TMC CEO and chair were invited to speak at the Ballyrashane AGM.

After only nine months, an entirely new co-op called Lac Patrick was born and started trading on 1 September. This brought together both boards into one which has 27 board members, but this will reduce over time.

This was always seen as a merger of equals by both CEOs, despite TMC receiving 85% of the shares in the new entity – due to its greater share of assets. The fact that the original co-ops now cease to exist is testament to this.

Lessons

If there are lessons for other co-ops, these centre on openness, relative speed of the merger and transparency from the start. It was ignited and then fostered by the strong relationship between the two CEOs who could see the business logic.

Through their strong leadership and communication skills, they got the backing of the chairmen and boards on this business case. The boards won the support of the shareholders who voted overwhelmingly in favour of the merger (88% TMC and 97% Ballyrashane).

Ultimately the end result needs to be reflected in an improved milk price and should be the only rationale for any merger.

Gabriel D’Arcy who assumed the role of chief executive at Lac Patrick said that he would be very disappointed if over time the new co-op cannot pay 1c more per litre.

This was born out of a necessity to make two relatively small co-ops (on a global scale) relevant in the market, and the ability to pay a competitive milk price.

By coming together into one single entity, they have formed many synergies, while also giving them a clear direction and vision for the future.

Quotes:

• Nothing is as big a turn-off as unrequited love (NK)

• If chemistry is wrong, then things don’t happen and the merger is doomed to failure. (NK)

• You’ve got 90 days to make an impact when you join a company or else you become part of the problem. (GD)

• Farmers should mutually respect each other – this is what the co-operative movement is all about. M+A in the co-op movement should be about more M and less A – a merger of equals (GD) (Merger and Acquisitions)

Who

Gabriel Darcy: Cut his teeth in the army, spent time in the Lebanon, joined Kerry ingredients, became CEO of Bord na Mona before joining TMC last year.

Nigel Kemps: Has spent 14 years with Ballyrashane, and became CEO 5 years ago. He oversaw the investment in the AD plant and the new butter plant.