Opinion: Kerry may be a once-in-a-lifetime opportunity

I have been watching the debate around the Kerry Co-op purchase of Kerry Group's Irish dairy business with interest.

My colleagues Lorcan Roche Kelly, Anne O'Donoghue, Aidan Brennan and editor Jack Kennedy have provided comprehensive coverage of what is a complicated package.

In essence, the 5,577 A and B shareholders are voting to purchase a 70% controlling interest in Kerry Group, with a commitment to buy the remaining 30% in the future. The price tag is €500m, but the sweetener for shareholders, particularly "dry" non-farming shareholders, is that 85% of the co-op's shareholding in Kerry Group will be shared out between them. The current value of those shares is over €1.4bn.

With the vote next Monday, I thought I'd throw in my tuppence worth.

I haven't been closely involved of late, but, for a few years, an inordinate amount of my time was spent covering the endless politicing within the co-op, the decline in relations between co-op and Kerry Group, the emergence of the shareholders alliance seeking to dissolve the co-op and have active milk suppliers start anew, with some seed capital from the residual wealth of the co-op to help them buy the Irish dairy business.

There was the "leading milk price" argument, which went through an exhaustive and ultimately inconclusive arbitration process. There was also the Revenue investigation into a patronage share scheme operated by Kerry. All that has taken place in less than a decade-Stan McCarthy's leading milk price pledge was made in 2011, but it was five years later that saw him resign his position as ceo of the co-op as relations between the co-op and plc deteriorated over the price being paid. It's been an exhausting, and not to the benefit of farmers, the processor, the co-op, Kerry Group, or the shareholders in either entity.

What will decide the outcome?

And now, at last, we come to this moment. Kerry co-op shareholders will gather in the Gleneagles Hotel at high noon on Monday, with the possibility of changing the trajectory for both themselves and Kerry Group.

In the end, people will vote on the fundamentals of the deal - the price being paid versus the value of the assets. There are wildly different interpretations of the deal on the table and that's only to be expected.

How valuable are the brands? How fresh is the processing capacity and how much ongoing investment is to be expected?

The flat-rate €7.5m a year dividend to be paid to Kerry Group is definitely a good deal in a good year, but is it a bad deal in a bad year?

Then there is the milk pool. Is it secure? Will voting yes to this offer make the milk pool more stable? Or will it encourage the Munster Dairy Producer Group or other groups of milk suppliers to look for pastures new?

Some of the people exploring the opportunity to leave Kerry and supply other processors may have been doing so as a way to force the issue of the milk processor's future.

Are they now happy with the deal that is on the table? Others seem to have a complete breakdown in trust, both in Kerry Group and Kerry Co-op.

Endless saga of leading price

All milk suppliers will benefit from a payout relating to the seemingly endless saga that is the "leading milk price" row if the deal is voted through. And those with substantial shareholding in the co-op will benefit from the shares they will receive.

For suppliers with less or no shareholding, the questions may be different. While they will have to contribute relatively little to the initial purchase, surely there will be some form of "share-up" requirement in the future.

Everyone would probably shape the package differently if they were designing it. But the package that has been negotiated is the only deal on the table right now.

If the co-op passes up this opportunity to regain control over the milk processing, will the people who supply Kerry get another chance?

The price might be a little north of what many farmers feel is good value, but, at the end of the day, you often only get one chance in your lifetime to buy the field of your dreams.

Do milk suppliers take the risk that a better deal will be offered to them if they vote this one down?

Dry shareholders' view

There are a lot of shareholders who don't supply milk to Kerry and the perspective they take will be interesting. For them, there is the opportunity to get 85% of the see-through value of their co-op shares.

Some - indeed many - phrase this as meaning that these shareholders "give" 15% of their shareholding in Kerry Group to part-fund the buyout of the new company.

I don't see it like that - and here's why. Kerry Co-op shareholders actually don't own any shares in Kerry Group from their shareholding in the co-op.

What they own is shares in a co-op that owns shares in Kerry Group. And the purpose of that co-operative - the reason it was set up in the first place - was to build a milk processor of scale in the southwest.

People who have shares in the co-op either bought them to support that vision - particularly in the early years, when there was no suggestion that they would ever be worth more than their face value. Either that or they bought them later as an investment opportunity, seeing that the massive and rapid development and growth of Kerry Group following the creation of the plc in 1986.

There was a clear market of buyers and sellers, and constant opportunity for anyone who wanted to take a punt on Kerry Co-op shares to do so

And that's a perfectly legitimate thing to have done. As some people who invested in shares have pointed out, there was a clear market of buyers and sellers, and constant opportunity for anyone who wanted to take a punt on Kerry Co-op shares to do so.

But they were buying shares in a co-op, not a plc. And the latent wealth that resides in the co-op is not entirely the property of the individual shareholders - it is held collectively on behalf of all the shareholders by the co-op within its structures. Anyone who has bought or inherited co-op shares should have known that.

For me, it's entirely appropriate that the co-op's board should try to secure the milk processing capacity for this and future generations.

And it's entirely appropriate that it should decide to use some of the co-op's latent wealth to part-fund the purchase. And it's also entirely appropriate that it should seek the approval of the shareholders for this extremely consequential decision, at this vital moment in the 50-year history of the co-op.

Significant reward

And yes, it's also entirely appropriate that all shareholders should get a significant reward for their investment in the co-op and through it, Kerry Group.

I think that being given 85% of the plc shares that your co-op shareholding equates to is a decent reward. I don't buy the argument that Kerry Co-op has simply been a hollowed-out structure, a shell co-op that was purely an investment vehicle in the plc.

For me, the fact that the investment was always in one plc - the plc that processed the milk supplied by farmers in the area - meant that the co-op always maintained its primary function, albeit at a remove.

And now the journey reaches another fork in the road, where Kerry Group wants to sell its Irish dairy business and the co-op wants to buy it.

But will all the dry shareholders present see this deal in that light? Or will they feel they are entitled to more than 85% and vote no?

Again, they should ask themselves if this is the best deal they are ever likely to be offered.

And perhaps offer up a prayer of gratitude to the people who milked the cows, processed the milk, developed the product mix and marketed and sold Kerry produce and ingredients all over the world.

They are the people whose sweat and innovation built this multi-billion behemoth of Irish business. And everyone who will vote on Monday has benefited from a half-century of toil. The co-op now has wealth - and wealth brings options.

Turnout will be a deciding factor

As is often the case in these matters, the people opposing the deal seem very motivated. One seasoned observer of all matters Kerry said to me that the higher the turnout, the better the prospects for a yes vote.

"The no voters will turn up - the big question is will the yes voters be energised to present themselves and vote?" - I think that's an astute assessment.

One other issue that may be a deciding factor is that for every share in Kerry Group that resides in the co-op, there are three or four more privately held by co-op members, mostly through previous spin-outs.

If this deal improves the Kerry Group share price, that increases the value of the billions of euros of shares in Kerry, Clare and Limerick kitchen drawers - a not-insignificant bonus.

Finally, I think all sides agree that if this deal goes through, there is a need to address the co-op shareholding in the medium-term.

People with no strategic interest - to use that hackneyed phrase - in dairy processing should be offered a way out of the co-op and people who want to milk cows should be offered utter control of their co-op going forward.

I am fascinated to see which option the co-op takes, but if my experience in Kerry has taught me anything, it's that nothing should ever be taken for granted. This will be a tense occasion.