The proposed 60:40 Joint Venture between Glanbia Co-op Society and Glanbia Plc marks the second attempt in three years by the Co-op to gain ownership, or at least part ownership, of Glanbia’s Irish milk processing assets.
After a previous initiative in 2009 failed by a very narrow margin to achieve the necessary 75% approval from Co-op members the Board must have been apprensive about revisiting the issue. This time the proposal is narrower and more focussed. Only the essential milk processing assets are in play. Glanbia Agribusiness is to remain with the Plc – at least in the short term. The 60:40 Joint Venture would give the Co-op a majority interest in the new entity to be known as Glanbia Ingredients Ireland (GII), for an investment of €44.5 million. There would be an additional equity investment amounting to €29.6 million of which the Co-op would have to contribute €17.8 m.illion bringing the total initial investment by the Co-op to €62.3 million. In order to fund the investment the intention is that the Co-op would sell 3% of it’s Plc shareholding to cover the €17.8m equity investment and part of the asset purchase cost of €44.5m. The residue would be funded by a loan note from the Plc.
Separate to this, but asociated with it from a funding point of view, is a proposal to ‘spin-out’ a further 7% of Plc shares to Co-op members with another 3% sold to reduce or eliminate the debt in the Co-op arising from the part purchase of Glanba’s Irish milk processing facilities.
Value For Money?
An initial study of the proposal by the Co-op to purchase Dairy Ingredients Ireland would suggest that the price offers reasonable value. By any standards the assets are in good order, having been regularly upgraded over the years. The idea of selling and ‘spinning-out’ shares to bring the Co-op shareholding of the Plc down to 41.4% will be a cause of concern to some members. However, the reality is that a majority shareholding in the Plc no longer offers any great influence in terms of delivering milk or grain prices above the commercial return. (Neither is it likely that the new entity would be capable of supporting milk or grain prices above market return). The new entity (GII) will face the prospect of financing a €150 million investment in new milk processing facilities at Bellview over the next few years. (Part of the cost of this would be funded from an ongoing contribution of 2c/l/annum from ‘new milk’ produced in the expected 60% milk output increase after the end of quot as in 2015).
What Co-op members would have if the proposals are accepted is 60% ownership of Glanbia’s Irish milk processing assets, practically debt free, while still retaining a substantial ongoing dividend flow from the remaining 41.4% shareholding in Glanbia Plc. In addition shareholders would receive shares in the Plc proportional to the number of Co-op shares they hold. For a Co-op member with 5,000 Co-op shares that would amount to over €12,000 worth of Plc shares that they could either retain or sell as they wish. That shareholder would still retain in excess of 4,000 Co-op shares, with a significant underlying value based on the Plc share price in the years ahead.
The deal as it is proposed makes economic sense and also allows dairy producers to gain some further control and ownership of the facilities that process the milk they produce. The real criticism relates to the argument that the Plc should be financing the proposed milk processing expansion allowing the Co-op to retain it’s 54.5% shareholding in the Plc. (Unlike Glanbia Plc, Kerry Plc has undertaken to finance all necessary processing expansion in their region). It is clear that the Glanbia board was not unanimous in supporting the Joint Venture initiative but ultimately the majority view prevailed. That’s democracy and that same democracy will determine whether the Joint Venture proposal is supported by the necessary majority of Co-op shareholders.