Suitors circling for LacPatrick

It has been a turbulent few days for LacPatrick, which culminated earlier this week in an emergency board meeting of the co-op, following which it announced an intention to seek a joint venture, partnership or merger with another milk processor.

Events were brought to a head after the co-op decided last Friday to cut milk prices to Northern suppliers by a further 2p/litre for March supplies, taking its base to 25p/l. That came after a 2.4p/l cut in February.

LacPatrick had offered a strong price in the autumn and early winter. But for March supplies, a base of 25p/l in the north, is less than competitors and effectively 3p/l behind the offer from Dale Farm for the same month.

For Republic of Ireland suppliers, LacPatrick announced a 2.5c/l cut to its March milk price, down to 28.7c/l. This followed a 3c/l cut to February milk prices. LacPatrick’s milk price for March is well behind competitors and 4c/l lower than the supported milk price of 32.8c/l paid by Lakeland to its suppliers.

That has caused a lot of anger among suppliers, and at the start of the week it is understood LacPatrick had more than 20 letters from farmers serving notice to leave.

There is also an additional dozen suppliers to Linwoods, which is to move over to LacPatrick from 1 May 2018. A number have been approached by other milk buyers in the last few days.

What happens next remains to be seen, but it is expected that most existing LacPatrick suppliers will now wait until the future of the co-op becomes clearer. As recently as last September, LacPatrick chief executive Gabriel D’Arcy went on record stating that more consolidation is necessary within Northern Ireland milk processing sector.

LacPatrick was formed in 2015 following the merger of Town of Monaghan co-op and the Co Antrim-based Ballyrashane co-op. Ballyrashane brought 100m litres of milk supplied by 100 farmer members. The co-op had sales of around €110m.

Today, LacPatrick has around 1,100 dairy farmer suppliers who supply 600m litres of milk per annum. About 500m litres of this milk, or 80%, is sourced from Northern Ireland-based farmers, with a further 100m litres coming from suppliers in the Republic of Ireland.

The most recent set of accounts for LacPatrick show the co-op had sales of €235m for its 2016 financial year and had operating profits of €3m. This gives the business a profit margin of 1.2%. However, the business made a pre-tax loss of €1.5m for the year due to exceptional charges of almost €4m, mainly related to currency headwinds. The net asset value of the business at the end of 2016 was just under €75m.

In 2017, LacPatrick opened its €42m investment in a new 7t/hour drier at its Artigarvan site in Co Tyrone. The co-op also operates processing facilities in Monaghan town and Ballyrashane. The investment in the Artigarvan site brought the total processing capacity of LacPatrick to 2.5m litres per day, or more than 600m litres annually.

This leaves LacPatrick with 35% extra milk processing capacity, with the co-op now becoming a third party processor for other dairy companies including Glanbia and Kerry.

LacPatrick has said it is looking at a number of strategic options for the business, which could include a partnership, joint venture, merger or other consolidation opportunities. The farmer c0-op said it has received approaches from “international and national companies” over recent months and was looking at its options.

The biggest interest in a merger or partnership with LacPatrick is likely to come from its neighbouring dairy processors. The most obvious of these is Lakeland Dairies, the Cavan-based co-op which has some recent form when it comes to acquisitions.

In 2016, Lakeland acquired Northern Ireland co-op Fane Valley Dairies for €13m. The acquisition brought an additional milk pool of 240m litres to Lakeland as well as a processing facility in Banbridge, Co Down. Lakeland processed 1.1bn litres of milk in 2017, with half of this sourced from Northern Ireland suppliers. However, this milk ais mainly processed in the south.

A potential tie-up with LacPatrick would fit in with the strategy adopted by Lakeland chief executive Michael Hanley since the Brexit vote. The Lakeland boss has said enhancing the co-op’s processing footprint in Northern Ireland is a major asset for the business as the Brexit negotiations unfold.

Also in the mix would be Glanbia Ireland, which has a significant supplier footprint in the border counties of Cavan, Monaghan and Louth. However, it has a small number of direct milk suppliers in Northern Ireland who supply Glanbia Cheese in Co Down. This is a joint venture with Leprino Foods that manufactures mozzarella cheese.

LacPatrick and Glanbia already have a partnership in place, with LacPatrick processing milk on behalf of Glanbia at its Artigarvan site. While the potential of a hard border post-Brexit might be receding, it is still a factor to be taken into account.

The third co-op based south of the border that may take an interest in partnering with LacPatrick is Aurivo. The northwest co-op collects about 75m litres of milk in Northern Ireland, after acquiring the milk processing assets of Donegal Creameries in 2012.

In Northern Ireland, Dale Farm co-op is certainly in the running to strike a deal with LacPatrick, especially given that many of LacPatrick’s suppliers in Northern Ireland were former members of Dale Farm co-op.

Dale Farm is currently the largest dairy co-op in Northern Ireland, collecting about 900m litres from farmers last year.

The co-op has sufficient processing capacity and is currently focused on driving efficiency within its own business. But as a minimum it is keen to attract new suppliers, especially those in winter milk.

Dale Farm went through a difficult 10-year period where it lost many of its suppliers to rival co-ops.

However, the co-op has stabilised its milk supply base in recent years, which is now starting to grow again with the co-op paying a much improved milk price to farmers.

The 100 ex-Ballyrashane farmers who now supply LacPatrick with approximately 100m litres, could yet be a fertile hunting ground, depending on where LacPatrick go next.