Last week Tipperary Co-op and Arrabawn announced they have entered exclusive preliminary discussions on a possible integration of operations, which may result in a merger of the two co-ops.
Looking at the recent track record of both processors, it is clear that Arrabawn is the larger, more profitable, and by far more financially stable of the two operations.
Over the past five years, the Nenagh-based co-op steadily improved its profit after tax from a loss of €1.6m in 2019 to a profit of €10.3m last year (see Figure 1) while also cutting its bank loans and overdrafts in half, from €49.2m in 2019 to €24.4m in 2023 (see Figure 2).
Further south in the county, Tipperary Co-op’s performance has been considerably less stellar across the same period. Profit was volatile, particularly in the last two years, falling from a high of €6.9m in 2022 to a loss of – what the Irish Farmers Journal understands to be - €6.8m last year. (Tipperary Co-op accounts for the year have yet to be published).
Bank debt
The stock of bank debt at Tipp has remained high throughout the period, with the last reported level at the end of 2022 close to €52m. In August of last year, Tipperary agreed on a full three-year financing of its term loans and working capital funding with lenders.
This refinancing agreement was undertaken when bank interest rates were at the highest level in more than a decade.
In 2022 Arrabawn processed 485m litres of milk from its own suppliers, while Tipperary’s own milk pool in that year was 200m litres. On every measure of size and financial strength, Arrabawn comes out on top.
Much of Arrabawn’s success in recent years has been due to the processor’s investment in casein production which has paid significant dividends. Going back a few years, there were considerable doubts around the wisdom of that investment, and the debt pile which the co-op has been so successful in reducing in recent years at one point led to questions around Arrabawn’s viability.
Whether through good planning, or good luck, those fears are now well passed for Arrabawn. For Tipperary, the question of whether it can stand alone as a small independent processor now looms large as it tries to make a success of its most recent significant investment in capacity around powder production.
When the Irish Farmers Journal sat down with then-CEO John Daly earlier this year, he said that he needed time for the spending to pay off.
The future
Over the coming weeks, it will be up to the members of both Tipperary Co-op and Arrabawn to decide, once they have been briefed by their respective boards, whether the best move for their futures is to be part of a larger, more diversified operation, or whether they are better off staying independent.
In the meantime, both processors have assured suppliers that operations will continue as normal ahead of any potential decision.
Right now the management of both Tipperary Co-op and Arrabawn are looking under the bonnet of each other’s operations – a process known as due diligence – and making decisions on whether a tie-up or merger of both co-ops into a larger entity makes sense, before giving a recommendation to their members on the future path for the processors.
The arguments in favour of a merger are, even allowing for the difference in size and financial strength of both operations, actually quite strong.
In a world where milk supply is increasingly looking like it has peaked, the only way for a processor to grow is through mergers. A larger operation should gain economies of scale and other efficiencies.
The geographical proximity of both operations, where suppliers already neighbour each other only increases the opportunites for further cost savings. With Tipperary and Arrabawn specialised in different markets, a merger would also bring diversification benefits to both operations. The volatility of global markets in recent years certainly points to the value of having a larger number of strings to a processor’s metaphorical bow.
Being “all in” on a small range of products can provide higher returns in the short term, but it does leave a processor more exposed when global markets inevitably turn.
Fresh risk
However, any deal will have to be seen as fair to members of both co-ops. Arrabawn members may feel that they are reaping the benefits of risky invesment decisions made in the past, and a merger with a struggling neighbour may prove a fresh risk they have no appetite for.
For Tipperary members, there may be a feeling that independence is a cause that is still not lost.
For the management of both co-ops the biggest challenge may yet be assuaging the fears of their members and getting their agreement on a way forward.
Talks are still at a preliminary stage.Arrabawn is larger and in a stronger financial position. A merger would bring increased diversification. The new co-op would have a milk pool of over 600m litres. Management would have to convince members a merger is the best way forward.
Last week Tipperary Co-op and Arrabawn announced they have entered exclusive preliminary discussions on a possible integration of operations, which may result in a merger of the two co-ops.
Looking at the recent track record of both processors, it is clear that Arrabawn is the larger, more profitable, and by far more financially stable of the two operations.
Over the past five years, the Nenagh-based co-op steadily improved its profit after tax from a loss of €1.6m in 2019 to a profit of €10.3m last year (see Figure 1) while also cutting its bank loans and overdrafts in half, from €49.2m in 2019 to €24.4m in 2023 (see Figure 2).
Further south in the county, Tipperary Co-op’s performance has been considerably less stellar across the same period. Profit was volatile, particularly in the last two years, falling from a high of €6.9m in 2022 to a loss of – what the Irish Farmers Journal understands to be - €6.8m last year. (Tipperary Co-op accounts for the year have yet to be published).
Bank debt
The stock of bank debt at Tipp has remained high throughout the period, with the last reported level at the end of 2022 close to €52m. In August of last year, Tipperary agreed on a full three-year financing of its term loans and working capital funding with lenders.
This refinancing agreement was undertaken when bank interest rates were at the highest level in more than a decade.
In 2022 Arrabawn processed 485m litres of milk from its own suppliers, while Tipperary’s own milk pool in that year was 200m litres. On every measure of size and financial strength, Arrabawn comes out on top.
Much of Arrabawn’s success in recent years has been due to the processor’s investment in casein production which has paid significant dividends. Going back a few years, there were considerable doubts around the wisdom of that investment, and the debt pile which the co-op has been so successful in reducing in recent years at one point led to questions around Arrabawn’s viability.
Whether through good planning, or good luck, those fears are now well passed for Arrabawn. For Tipperary, the question of whether it can stand alone as a small independent processor now looms large as it tries to make a success of its most recent significant investment in capacity around powder production.
When the Irish Farmers Journal sat down with then-CEO John Daly earlier this year, he said that he needed time for the spending to pay off.
The future
Over the coming weeks, it will be up to the members of both Tipperary Co-op and Arrabawn to decide, once they have been briefed by their respective boards, whether the best move for their futures is to be part of a larger, more diversified operation, or whether they are better off staying independent.
In the meantime, both processors have assured suppliers that operations will continue as normal ahead of any potential decision.
Right now the management of both Tipperary Co-op and Arrabawn are looking under the bonnet of each other’s operations – a process known as due diligence – and making decisions on whether a tie-up or merger of both co-ops into a larger entity makes sense, before giving a recommendation to their members on the future path for the processors.
The arguments in favour of a merger are, even allowing for the difference in size and financial strength of both operations, actually quite strong.
In a world where milk supply is increasingly looking like it has peaked, the only way for a processor to grow is through mergers. A larger operation should gain economies of scale and other efficiencies.
The geographical proximity of both operations, where suppliers already neighbour each other only increases the opportunites for further cost savings. With Tipperary and Arrabawn specialised in different markets, a merger would also bring diversification benefits to both operations. The volatility of global markets in recent years certainly points to the value of having a larger number of strings to a processor’s metaphorical bow.
Being “all in” on a small range of products can provide higher returns in the short term, but it does leave a processor more exposed when global markets inevitably turn.
Fresh risk
However, any deal will have to be seen as fair to members of both co-ops. Arrabawn members may feel that they are reaping the benefits of risky invesment decisions made in the past, and a merger with a struggling neighbour may prove a fresh risk they have no appetite for.
For Tipperary members, there may be a feeling that independence is a cause that is still not lost.
For the management of both co-ops the biggest challenge may yet be assuaging the fears of their members and getting their agreement on a way forward.
Talks are still at a preliminary stage.Arrabawn is larger and in a stronger financial position. A merger would bring increased diversification. The new co-op would have a milk pool of over 600m litres. Management would have to convince members a merger is the best way forward. 
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