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Glanbia co-op is proposing to sell 3% of its shares in the plc and use the funds to acquire a majority (60%) stake in the plc’s consumer foods and agribusiness division, known as Dairy Ireland. To sweeten the deal, the co-op is also proposing to transfer a further 2% of shares and spin out to co-op shareholders in the form of plc shares.
What is Dairy Ireland?
There are effectively two businesses in Dairy Ireland. The first is the consumer foods business and the second is the agri-retail, feed and fertiliser business. The price agreed between the co-op and the plc for the combined business is €186m, meaning the co-op will pay €112m to take a 60% share.
Dairy Ireland had sales of €616m and profits (EBITA) of €30.7m and made margins of 5% in 2016. Over a five-year period, the business delivered average profits of €23m with a margin of 3.6% (see graph on facing page).
Based on these profit levels, the co-op is paying six times 2016 profits or eight times average profits over five years for this business.
It is important to note that Glanbia does not separate the financials of the agribusiness and consumer foods divisions – both which are very different businesses.
Agribusiness
The agribusiness division comprises 53 retail outlets, two feed mills located at Clonroche in Wexford and Portlaoise, along with a food grade oats facility in Portlaoise. It is the largest buyer of Irish grain, purchasing approximately 195,000t annually.
Based on feed sales of about 480,000t and fertiliser sales of 230,000t, the agribusiness division has a total turnover of about €300m. Margins in this type of business are typically low at 1% to 2%, which would suggest it makes profits of around €6m to €8m.
One of the key benefits of farmers owning a majority stake in this business is that it brings the agri-trading closer to the farmer.
The agribusiness, while low-margin, is a solid cash generator and stable business. It does, however, have a high working capital requirement.
Consumer foods
Consumer foods comprises well-known brands such as Ireland’s second largest brand Avonmore, Premier milk, Snowcream, Kilmeaden and Wexford. Consumer foods has processing facilities at Lough Egish, Drogheda, Ballitore and Kilkenny. Over the last five years, Glanbia has invested €27m in Ballitore to include a milk package manufacturing plant. It also invested €15m in a UHT plant at Lough Eigish in 2015.
The division has sales of about €300m and is typically a higher margin business in the range of 5% to 8% depending on the year. Last year, consumer foods had profits at the higher end of the range, which equates to about €22m to €24m.
This profit was driven by weak dairy markets. When dairy markets are low, consumer foods performance improves as the price of the litre of milk does not change on the shelf.
However, when prices are high, performance is weaker as it is difficult to get price increases through with retailers.
The key benefit of having a consumer business is that it acts a natural hedge to the ingredients business farmers already own through GII. Put simply, when dairy markets are weak, profits in consumer foods will be higher and when dairy markets are strong, profits in commodity ingredients will be higher.
How was the Dairy Ireland price agreed?
In order to arrive at the agreed price, both sides engaged advisers to work on their behalf. The co-op employed Ernst and Young and legal advisers William Fry, while the plc employed IBI Corporate Finance and legal adviser Arthur Cox.
What will Glanbia Ireland be?
Should the deal go ahead, the new entity will incorporate the processing facilities of GII at Ballyragget, Belview, Wexford and Virginia to control the processing of 2.4bn litres of milk. The business will employ 1,800 employees, owning 11 production facilities and 53 agri-retail outlets and export to 60 countries.
It will also bring together the share in joint ventures and associates including Southeast Port services, Dovea Genetics, Grassland fertilisers (Kilkenny), Malting Company of Ireland and Co-op Animal Health.
The turnover in the business will be €1.5bn, with a targeted minimum profit margin of 3.2%.
Half of all profits will be kept in the business, with the other 50% returned to the co-op and plc to be split 60:40 respectively.
How will farmers see a return for this investment?
The new business must maintain a base profit level of 3.2% of turnover. This means in a €1.5bn turnover business, profits will have to be a minimum of €48m. Half of this (€24m) will stay in the business for future investment, while the other half will be distributed to the owners (60% to the co-op and 40% to the plc). In this example, the co-op will receive €14m while the plc will receive €10m. The share in profits returned to the co-op will be ring-fenced for active farmers.
Furthermore, the first €5m above the base profit (ie €53m) level goes to a member support fund for farmers. Anything above this figure is split 60:40. One of the key concerns for farmers will be on how the 3.2% margin level is arrived at. If this comes at the expense of the milk price, weak management or poor efficiencies, the farmer will suffer. The owners must ensure that the correct KPIs and management procedures are in place to ensure this is not the case.
Why are Glanbia plc selling this?
A simple look at the numbers, shows that this makes sense for the plc. It is exiting a lower margin (5%) business with slow or stagnant growth to concentrate on its higher margin performance nutrition (16%) and ingredients (9%) business. Glanbia plc has been building its performance and ingredients divisions and only last month announced that it was building at $400m cheese and whey plant with three partners in Michigan, while also acquiring Amazing Grass in the US and Body & Fit in the Netherlands for a total of €181m.
Dairy Ireland confused investors. Legacy assets such as these didn’t sit alongside the story of a high-end performance nutrition business. The immediate rise in the share price reflects this.
So why would Glanbia plc continue to hold 40% of the joint venture? The JV model has worked very well for Glanbia both in GII and in the US. This move will see all their primary dairy processing controlled by JV arrangements.
What % is needed to carry the proposals?
There are three key proposals which will require varying levels of approval. A simple majority (>50%) is required to approve the transaction to buy 60% of Dairy Ireland. A simple majority is also required to carry the creation of the €40m member fund. For the share spin-out to carry, it must be approved by 66% of shareholders. The final proposal, which will see one less seat by the co-op on the plc board from 2022 and provide the discretion of the board of the co-op to reduce to 28%, will also require a 66% majority.
Glanbia co-op shareholders in line for €10,000 spin-out boost
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