EL: Why is this a good deal for farmers?
ST: If I was a farmer in the southeast of Ireland and my primary interest was in growing my business, this deal means I’m going to have a majority ownership through my co-op of the business that is most aligned to my farm. This is very important considering the ambition of the supply base.
How will Glanbia Ireland have farmers’ interests at its core?
Firstly, Glanbia Ireland will be commercially led for the long-term sustainability of the business.
The situation for our supply base is toughest when markets are poor. Justifiably, co-ops support their members when market-led returns are below expectations.
This model where the co-op has a 60% controlling stake will have a number of layers to both drive a commercial organisation while supporting members, through dividend flows to the co-op in the tough times.
It also allows the creation of volatility funds within Glanbia Ireland and provides more scope for innovative schemes such as flexible finance (Milk Flex), fixed pricing and advanced payments schemes (GAP).
Why now?
Our milk suppliers have recently confirmed they wish to grow 30% between now and 2020.
Of course, Glanbia Ingredients Ireland (GII) could do that on its own having recently announced an investment programme of €250m-€300m to meet that growth.
Similarly, consumer and agri are perfectly fine businesses where they are, but I think taking that supplier ambition and the potential value creation together makes now a really good time.
This is a natural evolution given the journey GII has been on since 2012 and with the lifting of quotas in 2015, moves the group on to the next phase.
Shareholders seem to agree, where the share price touched record highs this week
There are a number of factors playing into this. Firstly our 2016 performance was very strong. Secondly, we had a number of strategic initiatives – Glanbia Ireland, a new Michigan joint venture (JV) and two on-trend acquisitions in performance nutrition. And thirdly, there are the normal moves of the market of how investors view food stocks versus other options.
Why does Glanbia plc need to retain 40% of Glanbia Ireland?
If you look at the evolution of the plc, a lot of primary processing is now conducted through joint ventures such as Southwest Cheese and our most recent JV in Michigan. For a plc shareholder, it provides clarity. The model is proven, because we set them up well, have good partners and make the relationship work. We are spending close to $1bn to support growth of those various businesses over the next number of years.
Do you see the plc reducing its shareholding in GI over time?
No, I actually don’t. I couldn’t come up with a compelling logic as to why the plc would have a 25% share versus 40%. I think it is important that the co-op has a majority stake, but also that the co-op is comfortable the plc is there as a strong partner. Of course if the two parties decide over time to alter that arrangement, it is a different discussion.
But are farmers selling down a high-margin business to buy a low-margin business?
No. Essentially the co-op is taking a modest percentage of its plc shares and getting 60% of a business that is closest and most aligned to the businesses that is in the best interest of its members. Based on the plc valuation, it makes a lot of economic sense. Margin is only one part of the story. The other part is return on investment. The businesses of consumer and agri are very strong in their own right, with a good return on capital and solid cash generation. It’s not about absolute margins; it’s about margins relative to your sector and how you are positioned in that sector.
What key benefit does Glanbia Ireland provide?
It has to be the complimentary nature and natural hedge that sits between all three entities when brought together under Glanbia Ireland. This delivers a more robust profit profile. A lot of the very large dairy co-ops in Europe, are increasingly making a distinction between earning the profit and driving the management to do that – in effect creating the pie. And then speaking about distribution of that pie as a separate piece. Glanbia Ireland will be similar to this.
How do you guarantee performance will not be hostage to milk price?
That is the day job. We have strict performance indicators around how we run our businesses, built on lean manufacturing principles that are deployed through all functions. Glanbia Ireland will be pushed to maximise business performance which means being really efficient convertors of milk, being really good at bringing the product to market, and having a progressive dividend policy.
Will it lead to improved milk prices?
It’s very hard to quantify, but I fundamentally believe that it will. Exactly what that quantum will be or how it will ultimately pan out, you can never be prescriptive on it.
The key times when we want flexibility for our supply base is when markets are low. Structurally this new business will keep less profits in the business when markets are low, so by definition there is going to be more capability regarding milk prices.
Also there is a clear plan if Glanbia Ireland overachieves against the 3.2% profit margin target where we will create a volatility fund.
Furthermore, we have a plan that the profits will not just sit in the business; 50% will be distributed to active farmers.
Are farmers getting value?
I can reassure all stakeholders that the process was robust and had strong governance around it. As in any normal commercial transaction, separate co-op and plc advisers looked through a whole suite of valuation methodologies, whether on earnings, asset valuations or discounted cashflows. As expected, there were healthy debates in reaching the deal from both sides and I believe all stakeholders are getting value.
How does this proposed deal benefit tillage and livestock farmers?
A strong co-op is good for all members. I believe Glanbia Ireland will have a desire and capability to support all farmers. While a lot of our history is weighted to milk suppliers, the board is very cognisant of grain and livestock farmers as well and they will continue to see that balance.
Why the need for the spinout?
It’s a reflection of the value creation that the plc has given the co-op and recognises that people may want to make individual choices around their investments.
Did Brexit influence the decision or timing?
In truth not at all. Brexit is a factor regardless of this transaction. I think the very strength of Glanbia Ireland will be a positive as we face challenges like Brexit.
Is Glanbia plc committed to Ireland?
This is a significant investment for Glanbia plc where we will have a 40% stake in a €2bn business. Glanbia plc is committed to being headquartered in Ireland.
What is being asked of the Glanbia Co-op members?
Glanbia proposal: questions to be asked
What’s behind the Glanbia deal?
Glanbia proposals: what farmers need to know
Comment: is the Glanbia proposal a good deal for farmers?
Farmer writes: Glanbia changes mean we can support our own business