The deal for Kerry Co-op to take a 70% share in Kerry dairy Ireland for €350m – and eventually buyout the remainder of the operation for another €150m - is structured so that it is the co-op, rather than necessarily the milk suppliers, who will own the processing assets.

As things stand right now, Kerry Co-op owns approximately 11% of the outstanding shares of Kerry Group plc, valued at €1.7bn. Kerry Co-op is owned by its shareholders, who are classed as either A (milk supplying), B (former milk supplying) or C (never supplied milk).

There are 2,604 A shareholders, 2,973 B shareholders and 6,329 C shareholders. Only A and B shareholders will get to vote on the deal.

Under the proposal, all shareholders will have each of their Kerry Co-op shares valued at 6.25 Kerry plc shares. Kerry Co-op will give each shareholder 85% of that value in Kerry plc shares – 5.3125 plc shares per co-op share - and use the balance towards the funding of the €350m payment for the 70% share of Kerry Dairy Ireland.

The valuation of the shares for that transaction will be based on the volume weighted average price of Kerry plc shares over the ten days prior to the completion of the deal – expected to be by the end of January next year. This means that all current shareholders in Kerry Co-op, no matter their distance from the actual business of milking cows, will be a shareholder in the new operation.

Conversely, any milk suppliers who are not shareholders will own no share in their processor.

At current market value, the 15% of Kerry Co-op’s shareholder, amounting to approximately 2.9m shares, is worth around €260m.

The balance of the €350m initial purchase price will be made up of €56m in bank debt and a loan agreement on commercial terms with Kerry plc.

It is very much in the interests of Kerry Co-op members that the share price of Kerry plc remains as high as possible between now and the end of January as the more the shares are worth, the less debt there will be in the new organisation.

For example, if Kerry plc shares traded €120.9 each, then the co-op could complete the deal without taking on any debt.

As recently as June of this year, those shares were trading at €74.40, a level which would require the co-op to borrow €135m to fund the deal.

The proposal does state that there is the potential for a value adjustment to the size of the payment “in the unlikely event that there is a material adverse movement in the value realised by the co-0p as a result of the share exchange” but it does not define what size would count as a “material adverse movement”.

Between the proposed completion of the deal early next year and the end of July 2030 Kerry Co-op can buy out the remaining 30% of Kerry Dairy Ireland for €150m.

The co-op said that funding for the purchase of the remaining share of the business will come from a mix of equity and retained cash in the business.

If Kerry Co-op does not buy the balance of the business by mid-2030, then Kerry Group can require it to make the purchase before 2035, with that purchase either funding by Kerry Co-op or by a further loan from Kerry Group.

Arbitration

A proposed solution to the arbitration over the “leading milk price” discussions is also part of the deal which will be voted on by A and B shareholders on December 16.

There will be €50m, funded by Kerry plc, for the resolution of the dispute which will be distributed to members pursuant to claims made under the milk supply agreement. James Tangney, Chair of Kerry Co-op, put the value of that payment at approximately 5.4c/l for those suppliers.

Kerry Group said that both sides have agreed that once the €50m fund is in place it will no longer have any liability for any existing or future claims from milk suppliers under the milk supply agreement.

Shareholders in the co-op at the most recent AGM were told that the arbitration deal would be completed before any proposal was made on the future strategy for the co-op.

The fact that it now forms part of the proposal on future strategy means that a shareholder vote against the strategy would also be a vote against the proposed arbitration payment.

The future

Tangney told the Irish Farmers Journal that the management team currently running Kerry Dairy Ireland would remain in place after the deal is completed.

During the joint-venture period, Kerry Dairy Ireland would be governed by a board consisting of seven from Kerry Co-op, three nominees from Kerry Group, and two independent non-executive directors.

The CEO of Kerry Dairy Ireland would also have a seat on the board.

As part of the proposal Kerry Group will get an annual dividend payment of €7.5m for as long as it retains its 30% stake.

While the new organisation will not be able to use the trademark Kerry branding, it will be able to use the Kerry Co-op name.

It will also have all the dairy consumer brands currently manufactured by Kerry Dairy Ireland.

It will have seven production facilities in Ireland and the UK which currently employ 1,500 people.

Tangney said that as part of the plan for the new organisation there is a projection in place for capital spending of approximately €25m per year.

From 2026 suppliers would be expected to make a productivity contribution of 1c/l.

He said that the plans for the future of the processor have been stress tested for a further cut in derogation, adding that Kerry was less exposed than some other processors as fewer than a quarter of its current milk suppliers would be hit by such a move.

Comment

Jim Woulfe, who had been employed by the board of Kerry Co-op to help with their strategic plan, told the Irish Farmers Journal that the “best possible deal is on the table”.

It might be more accurate to say that the offer is the only deal on the table. There is likely to be some disappointment from Kerry suppliers that offer to resolve the long-running arbitration dispute is being put forward as part of the overall deal. For Kerry Co-op’s B and C shareholders, the chance to get Kerry plc shares will probably be welcomed, even if it means that they will end up having 15% of their total holding converted into an ownership share of the new processor.

The A shareholders will get the same transfer as others, but probably have significantly more interest in owning the processor – as revealed in the survey of members earlier this year which showed it is an important issue for almost 90% of milk supplying members of the co-op.

There is a risk to this deal to Kerry Co-op from how it is structured. Milk suppliers’ current contract ends in April 2026. Tangney said that a new deal would be forthcoming following the closure of the deal, should it be approved at the shareholder vote.

However, Kerry suppliers are currently free to move to a new processor once their current supply contract ends. Without tying those suppliers into the new organisation from the start with a milk supply contract, Kerry Co-op could be giving them a window to cash in their shares, get an arbitration payment, and then move to another processor.

In short