Tomorrow, 7,500 co-operative members will vote to determine the future direction of the food group Glanbia. The vote is the first stage of a proposed process that will see Glanbia plc hive off its milk business in Ireland as part of a joint venture with its co-op shareholder.
The proposed new entity, Glanbia Ingredients Ireland, will be 60 per cent owned by the co-op and 40 per cent by the plc. It will oversee the completion of a new site at Belview in Kilkenny. The plc will then concentrate on its nutritional business, which has been the main driver of growth.
The first vote, which needs a 50 per cent majority, will involve the offloading of 3 per cent of the co-operative’s 54 per cent holding.
If passed, two more votes will be held, which will determine whether a further 10 per cent of Glanbia’s co-op share in the plc should be offloaded, 7 per cent of which will be distributed to farmers, and 3 per cent of which will be used to fund the new entity.
These votes – which will have implications for the funding of the new venture – need a 75 per cent majority.
Meetings have been taking place across the country in recent weeks between co-op members and the plc. As shareholders weigh up their options in the coming weeks regarding this extremely complex deal, the importance of the vote should not be underestimated. As it is the biggest milk processor in the country, how Glanbia proceeds as it seeks to take advantage of the opportunities afforded by the opening up of dairy markets in 2015.
Here two experts in the area outline their views on tomorrow’s vote.
John Bryan: For
This deal is fair and balanced, and in the best interests of Glanbia Co-op
The proposal to form Glanbia Ingredients Ireland (GII) is very different from what was put to farmers in 2010. I believe this deal is fair and balanced, and in the best interests of Glanbia Co-op farmer shareholders and the sector generally.
It will give shareholders a chance to realise some of the value from their long-term commitment to the co-op, which will be a benefit to farm families and the rural economy generally.
GII is not a co-op. However, it will clearly be run on co-op principles, with solid commitments on maximum profit retention that prioritise milk prices to farmers.
The IFA has a long-held view that farmer control of dairy processing is important, and this proposal will see 60 per cent of the largest processor in the country under farmer control. The GII model will also unlock the investment needed to build the facilities that are essential to cater for the planned expansion by farmers.
The co-op will still own 41 per cent of a global nutritions business, which has the capacity to return significant dividends and further capital growth into the future. While this is not a majority shareholding any longer, it is a very valuable and influential shareholding by the co-op in the plc.
Significant move
Crucially for all shareholders, it will leave the co-op debt-free, with an annual dividend income of around €13 million, which can be used for all shareholders.
I believe the creation of GII will be a significant move in accelerating the collaboration between co-ops, which is necessary to improve the competitiveness of the entire sector and will be of benefit to all dairy farmers in the country.
On behalf of its Glanbia shareholder members, the IFA engaged an independent corporate finance expert from Deloitte, and a pension specialist from Eversheds. These experts were given access to confidential financial details and pension scheme documentation in order to assess the financial soundness of the GII proposal.
The Deloitte expert found that the valuation of assets to be purchased by the joint venture was reasonable by normal earnings multiples, and compared favourably with similar transactions in the global agribusiness sector.
The new entity will be in a strong position to meet its financial obligations on the basis of the first phase of the proposal alone. Obviously, the second part of the deal would strengthen significantly GII and the co-op’s financial position, and provide a spin-out of approximately €150 million for farm families at current plc share prices.
On the pension issue, the Eversheds expert was given detailed insight into the current provisions of the pension scheme as relevant to the staff transferring from Glanbia plc to GII. He confirmed that the scheme was approved and financed to meet its targets under a Pensions Board section 50 agreement, which has been signed up to by trustees and unions.
The experts then presented their reports to IFA elected officers from the Glanbia area. After extensive discussions, the officers agreed unanimously to recommend support for both phases of the proposals. The IFA executive council endorsed the plan last week. Both groups view the deal as fair and balanced. It meets the objectives of regaining farmer control, providing funding for the expansion and giving all shareholders, including the dry ones, an opportunity to unlock some of their investment now. Nobody has presented an alternative that better represents all interests and views.
As a Glanbia Co-op shareholder myself, I will be voting “yes” to both phases. I would encourage all shareholders to vote for this proposal in the interests of farmer control of dairy processing and securing the investment needed for expansion.
John Bryan is president of the Irish Farmers Association (IFA)
Laurence Harte: Against
Going back to co-op control is a step into the past motivated by opportunism
Glanbia plc is what we refer to as a co-op plc: 54 per cent of its equity is held by the co-operative and 46 per cent is in public flotation.
The co-op plc, conceived by Kerry co-operative in 1986, was at the forefront in dealing with the governance and funding shortcomings of co-operatives. It was truly entrepreneurial and unlocked enormous potential in the Irish food industry.
Arysta and its subsidiary Origin Enterprises, Glanbia itself and Kerry Group are by any standards outstanding Irish-based international food businesses.
The intent in the current proposal is to bring the dairy processing part of Glanbia back under full co-op control and in the process provide funding for new processing capacity required following the abolition of milk quotas in 2015. It also serves a desire of the main company to divest the dairy unit.
Mistake
Going from the progressive co-op plc and reverting to a pure co-operative is a mistake, a backward step that is certain to limit the longer-term potential and the downstream economic value of the Glanbia milk pool. A more value-creating move would be to again configure the new unit as a co-op plc or a variant.
Despite its proven worth, the Irish co-operative movement never fully embraced the co-op plc, opting to participate more as reluctant partners awaiting opportunities to get back to the old structures. Glanbia presents such an opportunity.
Ironically, it is being fuelled by the very success of Glanbia itself, the value of the co-op’s 54 per cent equity holding in the public company (€1.2 billion at November 6th, 2012), and the vaguely defined property rights of members in the co-op. It is a kind of “who really owns the field” situation, albeit a very, very big field.
Glanbia Co-op has about 16,000 members: 8,200 (51 per cent) are retired and disenfranchised under the arcane rules, 4,000 (25 per cent) are dairy farmers and 2,500 (16 per cent of total members) of these have expansion plans.
The main beneficiaries of the proposal are the 16 per cent with expansion plans.
The diversity of the membership derives from the absence of effective equity exit mechanisms in the co-op and the extent of the restructuring in dairy farming in recent years.
The “clever” part of the plan is to use six per cent of the equity of the plc (€136 million at November 6th, 2012), which belongs to all co-op members, to provide the equity for the new venture, even though only the minority stand to benefit.
The spinout of a further 7 per cent (€159 million at November 6th, 2012) directly to members is the carrot to persuade them to agree to this unbalanced deal by which members will forgo €6 to unlock every €7 of their equity.
In this process, the non-benefiting majority will gift a substantial part of their capital to the minority, mainly to fund the new processing capacity. The disturbing part is not so much the obvious inequity between members, but the opportunistic nature of the plan.
Some farmers may justify this opportunism to gain co-op control in the expectation that in future they can pay themselves higher milk prices, but this is an unrealistic expectation in a competitive market, and certainly unsustainable longer term.
Others will rationalise return to the co-op by selectively citing the success of dairy co-ops abroad, but ironically these businesses are more like the co-op plc they are leaving than the structure they hope to establish.
The main argument against the proposals, therefore, is that going back to co-op control is a step into the past that is motivated more by opportunism and narrow co-op self-interest than by a determination to create economic value.
Laurence Harte is a former senior lecturer and head of agribusiness at UCD
