The proposed Glanbia Co-op buyout of the plc shares in Glanbia Ireland is just a week old and two items have been raised repeatedly by co-op members – the valuation and the investment fund.
This week we sat down with new CEO of Glanbia Co-op Jim Bergin, and David O’Kelly from KPMG. Let’s start with the valuation.
Speaking to the Irish Farmers Journal this week, David O’Kelly of KPMG said: “GIanbia Ireland served its purpose and the business experienced a lot of growth under current ownership, but, as we look forward, the rigidity in that structure, as the plc needed protections, was going to limit Glanbia Ireland in its own strategy and how the co-op can serve its members first. That was the clear outcome of our initial strategy work.”
David went on to explain how the value was established. So €307m is the announced value and that is important for the plc. However, the effective economic price is the important number for the co-op membership, and that works out at €286m.
“There is €17m of a dividend not distributed to the plc, €4m of a new contribution to transformational costs from the plc and €4m of pension costs from a previous deal that the plc will cover, which effectively brings us to the €286m price,” O’Kelly said.
Some 4,400 shareholders voted to create Glanbia Ireland and both Jim Bergin and Siobhan Talbot suggest this is the natural finish of that journey which started in 2012. \ Donal O’Leary
So what is taken into account in this? “A big issue for the board was milk price and factoring that into any negotiated price. Other issues important to the deal are debt off balance sheet, debt on balance sheet, an existing pension scheme and a €28m shareholder liability that Glanbia Ireland needs to repay within one year. We looked at capital expenditure and the final negotiated price is a multiple of 9.2 times current year profits. Where that sits is in the lower half of our benchmarked companies.”
So how does this stack up? EBITDA, or earnings before interest, taxes, depreciation and amortization, is one measure of a company’s overall financial performance.
In this case, Glanbia Ireland hasn’t published 2021 profit numbers yet so the multiple 9.2 is based on predicted profit margins. More detail on the multiple of EBITDA will be required as there have been some other multiples mentioned. Glanbia has said it will return with detail.
When we get clarity we will compare what is comparable.
Overall, Glanbia Ireland’s balance sheet is in good shape. The net asset value of the business increased last year (2020) to €463m, while the company has continued to make progress in reducing borrowings.
Glanbia Ireland’s net debt levels last year fell 20% to just under €231m. Glanbia Ireland continues to await the outcome of the review into its €150m investment in the Royal A-ware cheese plant.
Investment fund – a contentious issue for some
The other piece of the deal that has raised eyebrows is the creation of an investment fund, or at least getting shareholder approval now for the creation of an investment fund, by selling down another 4% chunk of plc shares. At €14 per share, this fund would come to about €170m. A 3% tolerance below this is also planned.
Newly appointed CEO Jim Bergin suggests this fund would be used to diversify any future investment of the new entity and any returns from such a diversification will benefit all shareholders.
He said: “We are entering into a new era where the next decade will be sustainability in farming. We need the ability to focus on value add and the whole sustainability economy will be important.
“We are not sure what will emerge, but there is the circular bioeconomy area, issues of feed science and low methane, renewables and any of these are a good reason to set up a flexible fund like this.”
Bergin pointed to the €13m spent in 2004 on Kortus in Germany by Glanbia as the seed company which has grown into the performance nutrition business.
When asked why invest in an unknown entity, to take a shot in the dark in effect, rather than leaving the investment to the plc which has investments in the non-dairy space already, Bergin stressed the return from any investment needs to be better than what the business can get from the plc shareholding.
He said: “The plc has been an excellent investment for us and sets the bar for us, before on any other investment, so we’d like to do it ourselves in the same way.”
When pushed on what the return is on the plc investment, he wouldn’t be drawn specifically on this and said, “the strategy sub committee of the co-op will set the criteria for successful investments having regard to the returns from the plc and the strategy context at the point in time”.
1 Future relationship with Ornua? There is no impact whatsoever on the Ornua relationship – Glanbia Ireland is a committed shareholder (23% holding).
2 Committing to paying the highest possible milk or grain price doesn’t mean much to farmers so can you be more specific? The co-op will be stronger for farmers, with 100% ownership of the processing assets. The board unanimously supports this proposal and strongly believes it is in the long-term interests of farmers. The new entity will have a farmer-focused co-op culture, with greater flexibility to support farmers, pursue new opportunities and focus on adding value to our milk and grain for the benefit of farmers.
3 You say the requirement for the profit after tax is gone, but should that or a version of it not still be included to allow the business grow rather than sell down shares in the plc? The current 3.2% profit after tax (PAT) requirement will no longer apply. The future financial policy of the organisation will be more in tune with co-op models globally, while providing greater flexibility for investment and for farmers. However, it is important to note the business will still operate to a strong profit target.
4 Banking arrangements post a successful deal – So the yet to be named co-op will have debt in the order of €230m initially? Will banks require new commitments from the co-op? No new commitments and it is a big player so no change to banking convenants.
5 The co-op portion of debt for A-Ware project – is there any risk strategy for the business completed if the Royal A-Ware deal doesn’t happen?Is there a claw back if this JV deal doesn’t go ahead? Plans have been made taking into account the possibility of further delays but the business plan at the moment is that it would go ahead. No is the answer to the claw back.
6 Is the intention to propose and vote on the different aspects of the deal separately? ie 4% sell-off for main transaction, then 4% spin-out, and then 4% investment fund. If the investment fund doesn’t get backing, what happens? Is it all or nothing? Details of the shareholder resolutions and proposed rule changes to enable the set of proposals will be circulated to shareholders shortly.
7 For dry shareholders, investment in the plc will be significantly reduced – why should they vote for this when alternative financing methods are available? The financing proposal is very attractive to all shareholders, with a spin-out of plc shares to the tune of €168m off current share price. This amounts to over €11,000 to the average shareholder but many will benefit to a much greater degree as there is considerable variation in share ownership. In addition, the board pays a progressive co-op dividend to all shareholders and dry shareholders also benefit from a related element of patronage schemes. In the future it is envisaged that dry shareholders would participate in returns from the investment fund.
8 Is executive management tied into new business? Yes – strong management team and want those people to stay.
9 Is there a management incentive for this to happen immediately or over time? No.
10 Stability of the management structure post deal will be important. Is management tied in for duration of the transaction? For at least strategy delivery – three years? Longer? This transaction is a share purchase of the outstanding 40% of shares which are currently owned by the plc. The business is at the moment managed on a standalone basis, therefore the only change is the absorption of GI 100% into the co-op. From a day-to-day management perspective little is changing other than the management of the plc investment and the ambitious use of the investment fund.
11 What is the remuneration structure for management post deal? Employee remuneration is benchmarked on a regular basis with the aim of being competitive in the labour market. These policies will continue to evolve in line with global best practice.
Proposed plc exit not green washing – Talbot
Since the deal was revealed, some of the commentary around the plc selling its share in Glanbia Ireland has centred around the plc getting rid of a part of its business that is a drag on the plc’s climate ambitions and that a move like this would help the plc’s green credentials.
The boss of the plc, Siobhan Talbot, was quick to refute that this week: “Absolutely not is this the case. We have worked with livestock farmers a long time and continue to work with dairy farmers in the US so any links to exiting farming is nonsense. The reality is this journey started in 2012 and together we have built a great business and this is just the natural home for the Glanbia Ireland business. We want to take the plc further into the nutritional space so that’s the logic and objective for the plc.”
There was some speculation that the new entity was going to invest in plant-based businesses similar to what the plc has already invested in, like businesses such as Amazing Grass etc. When I asked the plc boss if she was concerned that the new entity was selling down a stake in the plc to potentially invest in an unknown entity and that doesn’t reflect well on the plc, she dismissed this as not a question for the plc but more a question for the new entity owners. “That’s a question for the board of the proposed new co-op. The plc ambition is clear, we have large growth platforms and we are going to meet our guidance on growth and profits in 2021,” she said.
Talbot was asked was there any increased risk for the plc in leaving behind the core dairy whey product, with no guarantees on volume or price – she said no.
The final questions we put to the plc boss centred around the share price movement since the announcement – the price has moved below €13/share down from €14 – the market doesn’t seem to like this proposal – why? “I don’t think it has to do with the deal. Shareholders get the logic of the deal. Markets are volatile at the moment with the most recent COVID wave, supply chain challenges and geopolitical issues, so I think the markets are reflecting those issues more than the proposed new deal.”
Finally, when asked if there an executive management incentive for this deal to happen or a payout for stepping back from Glanbia Ireland the categorical answer was no. No incentive, no payout.
The proposed Glanbia Co-op buyout of the plc shares in Glanbia Ireland is just a week old and two items have been raised repeatedly by co-op members – the valuation and the investment fund.
This week we sat down with new CEO of Glanbia Co-op Jim Bergin, and David O’Kelly from KPMG. Let’s start with the valuation.
Speaking to the Irish Farmers Journal this week, David O’Kelly of KPMG said: “GIanbia Ireland served its purpose and the business experienced a lot of growth under current ownership, but, as we look forward, the rigidity in that structure, as the plc needed protections, was going to limit Glanbia Ireland in its own strategy and how the co-op can serve its members first. That was the clear outcome of our initial strategy work.”
David went on to explain how the value was established. So €307m is the announced value and that is important for the plc. However, the effective economic price is the important number for the co-op membership, and that works out at €286m.
“There is €17m of a dividend not distributed to the plc, €4m of a new contribution to transformational costs from the plc and €4m of pension costs from a previous deal that the plc will cover, which effectively brings us to the €286m price,” O’Kelly said.
Some 4,400 shareholders voted to create Glanbia Ireland and both Jim Bergin and Siobhan Talbot suggest this is the natural finish of that journey which started in 2012. \ Donal O’Leary
So what is taken into account in this? “A big issue for the board was milk price and factoring that into any negotiated price. Other issues important to the deal are debt off balance sheet, debt on balance sheet, an existing pension scheme and a €28m shareholder liability that Glanbia Ireland needs to repay within one year. We looked at capital expenditure and the final negotiated price is a multiple of 9.2 times current year profits. Where that sits is in the lower half of our benchmarked companies.”
So how does this stack up? EBITDA, or earnings before interest, taxes, depreciation and amortization, is one measure of a company’s overall financial performance.
In this case, Glanbia Ireland hasn’t published 2021 profit numbers yet so the multiple 9.2 is based on predicted profit margins. More detail on the multiple of EBITDA will be required as there have been some other multiples mentioned. Glanbia has said it will return with detail.
When we get clarity we will compare what is comparable.
Overall, Glanbia Ireland’s balance sheet is in good shape. The net asset value of the business increased last year (2020) to €463m, while the company has continued to make progress in reducing borrowings.
Glanbia Ireland’s net debt levels last year fell 20% to just under €231m. Glanbia Ireland continues to await the outcome of the review into its €150m investment in the Royal A-ware cheese plant.
Investment fund – a contentious issue for some
The other piece of the deal that has raised eyebrows is the creation of an investment fund, or at least getting shareholder approval now for the creation of an investment fund, by selling down another 4% chunk of plc shares. At €14 per share, this fund would come to about €170m. A 3% tolerance below this is also planned.
Newly appointed CEO Jim Bergin suggests this fund would be used to diversify any future investment of the new entity and any returns from such a diversification will benefit all shareholders.
He said: “We are entering into a new era where the next decade will be sustainability in farming. We need the ability to focus on value add and the whole sustainability economy will be important.
“We are not sure what will emerge, but there is the circular bioeconomy area, issues of feed science and low methane, renewables and any of these are a good reason to set up a flexible fund like this.”
Bergin pointed to the €13m spent in 2004 on Kortus in Germany by Glanbia as the seed company which has grown into the performance nutrition business.
When asked why invest in an unknown entity, to take a shot in the dark in effect, rather than leaving the investment to the plc which has investments in the non-dairy space already, Bergin stressed the return from any investment needs to be better than what the business can get from the plc shareholding.
He said: “The plc has been an excellent investment for us and sets the bar for us, before on any other investment, so we’d like to do it ourselves in the same way.”
When pushed on what the return is on the plc investment, he wouldn’t be drawn specifically on this and said, “the strategy sub committee of the co-op will set the criteria for successful investments having regard to the returns from the plc and the strategy context at the point in time”.
1 Future relationship with Ornua? There is no impact whatsoever on the Ornua relationship – Glanbia Ireland is a committed shareholder (23% holding).
2 Committing to paying the highest possible milk or grain price doesn’t mean much to farmers so can you be more specific? The co-op will be stronger for farmers, with 100% ownership of the processing assets. The board unanimously supports this proposal and strongly believes it is in the long-term interests of farmers. The new entity will have a farmer-focused co-op culture, with greater flexibility to support farmers, pursue new opportunities and focus on adding value to our milk and grain for the benefit of farmers.
3 You say the requirement for the profit after tax is gone, but should that or a version of it not still be included to allow the business grow rather than sell down shares in the plc? The current 3.2% profit after tax (PAT) requirement will no longer apply. The future financial policy of the organisation will be more in tune with co-op models globally, while providing greater flexibility for investment and for farmers. However, it is important to note the business will still operate to a strong profit target.
4 Banking arrangements post a successful deal – So the yet to be named co-op will have debt in the order of €230m initially? Will banks require new commitments from the co-op? No new commitments and it is a big player so no change to banking convenants.
5 The co-op portion of debt for A-Ware project – is there any risk strategy for the business completed if the Royal A-Ware deal doesn’t happen?Is there a claw back if this JV deal doesn’t go ahead? Plans have been made taking into account the possibility of further delays but the business plan at the moment is that it would go ahead. No is the answer to the claw back.
6 Is the intention to propose and vote on the different aspects of the deal separately? ie 4% sell-off for main transaction, then 4% spin-out, and then 4% investment fund. If the investment fund doesn’t get backing, what happens? Is it all or nothing? Details of the shareholder resolutions and proposed rule changes to enable the set of proposals will be circulated to shareholders shortly.
7 For dry shareholders, investment in the plc will be significantly reduced – why should they vote for this when alternative financing methods are available? The financing proposal is very attractive to all shareholders, with a spin-out of plc shares to the tune of €168m off current share price. This amounts to over €11,000 to the average shareholder but many will benefit to a much greater degree as there is considerable variation in share ownership. In addition, the board pays a progressive co-op dividend to all shareholders and dry shareholders also benefit from a related element of patronage schemes. In the future it is envisaged that dry shareholders would participate in returns from the investment fund.
8 Is executive management tied into new business? Yes – strong management team and want those people to stay.
9 Is there a management incentive for this to happen immediately or over time? No.
10 Stability of the management structure post deal will be important. Is management tied in for duration of the transaction? For at least strategy delivery – three years? Longer? This transaction is a share purchase of the outstanding 40% of shares which are currently owned by the plc. The business is at the moment managed on a standalone basis, therefore the only change is the absorption of GI 100% into the co-op. From a day-to-day management perspective little is changing other than the management of the plc investment and the ambitious use of the investment fund.
11 What is the remuneration structure for management post deal? Employee remuneration is benchmarked on a regular basis with the aim of being competitive in the labour market. These policies will continue to evolve in line with global best practice.
Proposed plc exit not green washing – Talbot
Since the deal was revealed, some of the commentary around the plc selling its share in Glanbia Ireland has centred around the plc getting rid of a part of its business that is a drag on the plc’s climate ambitions and that a move like this would help the plc’s green credentials.
The boss of the plc, Siobhan Talbot, was quick to refute that this week: “Absolutely not is this the case. We have worked with livestock farmers a long time and continue to work with dairy farmers in the US so any links to exiting farming is nonsense. The reality is this journey started in 2012 and together we have built a great business and this is just the natural home for the Glanbia Ireland business. We want to take the plc further into the nutritional space so that’s the logic and objective for the plc.”
There was some speculation that the new entity was going to invest in plant-based businesses similar to what the plc has already invested in, like businesses such as Amazing Grass etc. When I asked the plc boss if she was concerned that the new entity was selling down a stake in the plc to potentially invest in an unknown entity and that doesn’t reflect well on the plc, she dismissed this as not a question for the plc but more a question for the new entity owners. “That’s a question for the board of the proposed new co-op. The plc ambition is clear, we have large growth platforms and we are going to meet our guidance on growth and profits in 2021,” she said.
Talbot was asked was there any increased risk for the plc in leaving behind the core dairy whey product, with no guarantees on volume or price – she said no.
The final questions we put to the plc boss centred around the share price movement since the announcement – the price has moved below €13/share down from €14 – the market doesn’t seem to like this proposal – why? “I don’t think it has to do with the deal. Shareholders get the logic of the deal. Markets are volatile at the moment with the most recent COVID wave, supply chain challenges and geopolitical issues, so I think the markets are reflecting those issues more than the proposed new deal.”
Finally, when asked if there an executive management incentive for this deal to happen or a payout for stepping back from Glanbia Ireland the categorical answer was no. No incentive, no payout.
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