Glanbia expansion plan expected to exceed E500 million with new Kilkenny milk plant to bring an extra E240 million in benefits

A REVOLUTIONARY plan which would release 13% of Glanbia Co-operative shares as Glanbia Plc shares bringing in E216 million had been revealed to shareholders of the co-op which has a 54.4% controlling interest in the giant Plc writes Sean Keane.

A REVOLUTIONARY plan which would release 13% of Glanbia Co-operative shares as Glanbia Plc shares bringing in E216 million had been revealed to shareholders of the co-op which has a 54.4% controlling interest in the giant Plc writes Sean Keane.

In a well planned initiative, the board of the farmer owned co-op has today (Wednesday) written to all shareholders recommending that the Co-op enter into a 60% (Co-op): 40% (Plc) joint venture with Glanbia Plc in respect of Dairy Ingredients Ireland, the Irish dairy processing business of Glanbia Plc (Glanbia or the Plc). The Society’s stake will be part funded by the sale of 3% of the issued share capital of Glanbia Plc, of which the Society is currently the 54.4% majority shareholder. This requires a simple majority of shareholders.

The Co-op is also proposing a further 10% share spin-out and sale of its shareholding in the Plc. 7% would be transferred directly to Co-op members as a share spin-out (€122 million value based on closing share price of €5.91 on Friday, 24 August 2012). 3% (valued on the same basis at €52 million) would be sold by the Society to inject additional equity into the Joint Venture (“JV”) with the remainder being retained by the Society thereby strengthening its balance sheet.

Both the JV and the share spin-out and sale are being put to a member vote. The share spin-out and sale is contingent on a successful joint venure (JV) vote. If the JV is not approved neither proposal will proceed. If the share spin-out and sale is approved which wil lrequire a 75% majority of co-op shareholders, the Co-op would remain by far the largest shareholder in the Plc, with a 41.4% interest valued at €718 million (based on closing Plc share price on 24 August 2012).

In the letter to Co-op shareholders, the board said that based on feedback from milk suppliers, the GII joint venture incorporated an increase in peak processing capacity of up to 60%. Subject to the JV going ahead, GII will invest €150 million in a new, green-field dairy processing facility in Belview, Co Kilkenny, planning permission for which is progressing. A further €30 million would be invested to enhance capacity in Ballyragget and Virginia.

The Belview facility would have capacity to process 19 million litres of milk each week and would employ up to 70 staff. The total economic benefit of increased milk production for this project is expected to exceed half a billion euro per annum, with the processing facility projected to deliver direct benefits of €240 million.

Commenting, Co-op Chairman Liam Herlihy said “Now is the right time to evolve the existing Co-op and Plc model which was introduced in the quota era that began almost 30 years ago. This joint venture will enable the Society, on behalf of all members, to gain a direct, 60% ownership of assets that are critical to milk production and expansion. It will create a sustainable platform, post milk quotas, for a projected 60% growth in milk output by 2020. Both the JV and share spin-out proposals deliver tangible benefits for all members.”

The details

GII would include the business and assets of Dairy Ingredients Ireland (“DII”). This is a large scale, well invested business that in 2011 generated revenues of €738 million and earnings before interest, tax, depreciation and amortization (EBITDA) of €44 million. DII is the largest dairy ingredients processor in Ireland, assembling a milk pool of 1.6 billion litres, and processing it into c.180,000 tonnes of dairy ingredients, largely for export to over 50 countries. DII employs over 500 staff who would transfer to GII together with the relevant Irish pension obligations.

Also included would be Glanbia’s 45% share of the Corman Miloko Joint Venture and its 23% share in the Irish Dairy Board. The JV proposal includes the option for the Society to acquire, on a pre-determined basis, the remaining 40% of GII within a six year period post completion, to achieve full ownership.

Example

As an illustrative example, based on the carrying value for the fixed assets at 31st December 2011 of €110.4 million less a €20.0 million agreed discount and €16.3 million for pensions, the agreed valuation is €74.1 million (for reference the replacement cost is in excess of half a billion euro). The Society would therefore pay a consideration of €44.5 million for its 60% interest in the JV. In addition, the JV partners would inject €29.6 million of fresh equity into GII, of which the Society would invest €17.8 million, reflective of its 60% stake. This would bring the Society’s total investment to €62.3 million.

Society Financing

The Society’s €62.3 million investment, using the illustrative example above, would be financed by:

The sale of 3% of the share capital of Glanbia Plc (€52.1 million value as at the closing price, 24 August 2012); and

A balancing loan note from the Society to the Plc of €10.2 million.

The Society is also proposing a 7% spin-out of Plc shares to Society members and a further 3% share sale to generate a cash fund for the Society. The spin-out or distribution of 7% of Plc shares valued at €122 million (closing price, Friday, 24th August) offers members the choice to participate directly in the success of the Plc by holding or selling the shares. Plc shares will be transferred pro-rata to a member’s shareholding in the Society, illustrated as follows:

Current Society Shares (illustrative example) 5,000 10,000

Plc shares received as part of Spin-out 2,138 4,276

Value of Plc shares received €12,635 €25,271

Society Shares held post Spin-out 4,357 8,713

The proceeds from the 3% sale would enable the Society to contribute more cash equity into the joint venture (in portion to additional equity from the Plc) as well as creating a cash reserve for the Society. Under this scenario, the Society would be aiming to be debt free within two years of the JV completion.

Approvals

Both the proposed joint venture (simple majority) and the share spin-out and sale (75% majority) will be subject to votes by A1 and A2 members. The Society decided to seek member approval to enter into the JV to ensure a fair and democratic process in choosing its future direction. A yes vote to the joint venture will enable a vote on the spin-out and sale. A no vote to the joint venture will mean that neither proposal will proceed. The Board carefully considered making the spin-out and sale conditional on the joint venture to ensure that the Society does not risk putting critical milk processing assets beyond the control of members.

GII milk expansion

Based on feedback from milk suppliers, the GII joint venture incorporates an increase in peak processing capacity of up to 60%. Subject to the JV going ahead, GII will invest €150 million in a new, green-field dairy processing facility in Belview, Co Kilkenny, planning permission for which is progressing. A further €30 million would be invested to enhance capacity in Ballyragget and Virginia.

The Belview facility would have capacity to process 19 million litres of milk each week and would employ up to 70 staff. The total economic benefit of increased milk production for this project is expected to exceed half a billion euro per annum, with the processing facility projected to deliver direct benefits of €240 million.

GII financing

Fixed assets would be transferred to GII on a debt free basis and GII would receive an equity injection of €29.6million from the JV partners. GII will pay the Plc for working capital at completion, which in 2011 averaged €112 million. GII would independently fund milk expansion thereafter. This would be achieved as follows:

cash flows of the business;

a 2cpl contribution from suppliers, from 2015, in respect of expanding milk; and

bank debt (independent banking arrangements).

Commenting, Liam Herlihy said: “Our proposal is to develop a robust post quota dairy model that provides a structure for growth that is more aligned to the dairy processing and milk production requirements of our members. The JV and share spin-out and sale provide tangible benefits for all members, who now have two related decisions. Firstly, to vote on the JV and its associated milk expansion plans and secondly, to unlock value for the Society and all members, whilst still retaining a 41.4% stake in Glanbia Plc.

We believe these proposals deliver value for the current generation of farmers, reward the commitment and loyalty of the previous generation of farmer members and establish a solid and sustainable business for the next generation. As a Society we will ensure that members have all the information necessary to make an informed decision.”

Information programme

In addition to a letter to its members, the Society has circulated a question and answer sheet addressing the key information and processes relating to both of these proposals. A programme of information meetings, commencing with regional meetings today, will also take place and members are encouraged to attend. Additional information will also be published throughout the process to the Society’s website: www.glanbia.com/societyproposals