Glanbia’s dated co-op structure is coming under the microscope after the rejection of a deal to sell its dairy business

LIAM HERLIHY, chairman of Glanbia Plc, entered a makeshift press room in Kildalton Agricultural College in south Kilkenny at 5.45pm last Monday week. His face said it all. The much feted proposal to sell the company’s Irish dairy division to its 54 per cent shareholder, the Glanbia Co-op, had been narrowly defeated by co-op members.

The vote had required a 75 per cent majority in order to be passed. In the event, 73 per cent voted in favour – a result that was “tantalisingly close” as chief executive John Moloney was to describe it to analysts the following day.

The defeat of the proposed sale was a major blow to Glanbia. Both the listed business and the co-op had embarked on a major communications drive in the weeks leading up to the vote to convince co-op members that a sale would be beneficial for all.

Now, having openly admitted that a parting of the ways was in the best interests of all concerned, Glanbia plc is left with the division it expressly said it wanted to offload.

As the dust settles, and the company begins to weigh up its options, focus is now shifting to the role of the co-operative structure in the process.

As one shareholder put it, the only impediment to the deal going through was Glanbia’s co-op structure. “The plc wanted it, the majority of farmers want it but, because of the rules of the co-op, the deal can’t go through.”

But while Glanbia may have thrown the issue of co-operative rules into focus, there have been stirrings for some time that this complex and somewhat archaic corporate structure needs to be addressed.

Last year the corporate law division of the then Department of Enterprise, Trade and Employment embarked on a consultation process and review of the sector.

It is due to present its findings, and its proposals on a new legislative strategy for co-operatives, to the Government within the next month.

The primary issue facing the sector is its dated legislative structure. Co-operative societies occupy an unusual and unique position in Ireland’s corporate landscape.

Categorised as “friendly societies”, they are regulated and governed by the Industrial and Provident Societies Act – legislation which dates back to the 1890s. While the legislation has been amended to some extent since then, there has been no major overhaul of the system, and the provisions of the 1893 Act still form the main part of the legislative system applying to co-operatives in Ireland.

In addition most Irish co-ops are members of the Irish Co-operative Society (Icos) a body which offers a generic framework of rules for member co-ops. Individual co-ops then form their own rules in consultation with Icos.

The case of Glanbia illustrates the complexities of the structure. Last week’s ballot saw the peculiarities of the co-operative rules kick into action. These include:

• the need to have a 75 per cent majority;
• the prohibition of proxy votes;
• the requirement that one meeting, rather than various regional meetings should take place giving rise to significant logistical issues;
• the requirement, in the event that the deal was passed, that an identical meeting take place two weeks later.

Icos has said it had no role in the formation of the Glanbia Co-op’s rules, pointing out that the co-op drew up its own set of laws when the merger of Avonmore and Waterford took place in 1997.

Icos has a point. The co-op is now left in the situation where it must abide by its own rules, despite the fact that a majority of their members favour the sale.

Further, the Glanbia Co-op rules stipulate that, while, for the most part, any changes to the co-op’s rules need a two-thirds majority, a 75 per cent majority is required to sanction any change which would see the co-op’s holding in the plc fall below 51 per cent.

Critics of the co-operative systems point to such restrictive rules as evidence of a corporate entity which is resistant to change, and question the validity of a structure that seems more suited to a pre-industrial age than the realities of modern commerce.

Nonetheless, there is still a strong body of support for the system.

A major 2007 report by Forfás argued that the co-operative model of enterprise had a wider role to play in the Irish economy. Apart from the agricultural sector – which accounts for the vast majority of co-operative activity in Ireland – Ireland has few co-operative structures, in comparison to countries such as Japan, Australia and European countries where consumer, housing and water-management co-ops abound.

Economist Jim Power, who strongly supported the mooted Glanbia co-op buyback as representing the best deal for farmers, believes the co-op structure can play a central role in Irish agribusiness, provided co-ops are run on a business basis, rather than as a fund to support milk prices.

“The fact that, historically, some co-ops were not run properly has led to an image problem for co-ops,” he says. “As long as they are run professionally, there is no reason why co-ops cannot play a central role in Ireland’s agribusiness sector.”

One issue all stakeholders agree on, however, is that major change is required in the Irish dairy sector.

There is a sense among those in the industry that Ireland’s dairy business is entering a watershed due to two separate factors – increased competition as markets open up, and the planned removal of milk quotas.

Just as the introduction of milk quotas in the 1980s arguably drove the commercial direction of Ireland’s dairy industry, forcing companies like Glanbia to focus on other business abroad to generate profits, the lifting of restrictions on milk production looks set to dictate the future direction of Ireland’s dairy sector.

Further rationalisation of the sector is perceived as essential by most in the industry if Ireland is to keep its head above water in this new commercial environment.

Advocates of consolidation point to countries like the Netherlands, Sweden and Germany, where milk production is dominated by a major co-op, as the most logical next-step for Ireland’s dairy industry.

It is in this context that the rejection of Glanbia’s deal needs to be seen. While never explicitly stated, it was felt by many that a newly demerged Glanbia Co-op, with its extensive processing facilities, could have been the obvious dominant player in Ireland.

The defeat of the proposal to decouple Glanbia from the co-op raises questions for the industry as a whole, but the company itself is left to deal with its own internal issues.

The board of Glanbia plc is likely to face tough questions from shareholders at next Tuesday’s agm.

Even more challenging will be the co-op’s agm on June 9th. Glanbia co-op says it is sounding out its members through its local network, and that any developments will be driven “organically” from the co-op members themselves.

The cyclical nature of the dairy industry is also creeping into the debate. Although announced in March this year, the decision to split the company grew out of the context of a particularly bad time for milk prices last year.

Now, with milk prices improving, staying with the listed company might not seem like such a bad option. Indeed analysts have been positive about the company’s prospects of late, particularly the improving outlook for its dairy division.

This short-term perspective might not necessarily make strategic sense but it may be something that weighs on the minds of co-op members – especially at a time of broader economic recession.

It might take another fall in milk prices to make farmers seriously reconsider the option of buying back the dairy business. The question is, will the Irish dairy industry be able to wait that long?

Co-operative approach: from Plunkett to Glanbia

THE FIRST co-op was established in Ireland in 1889 by Horace Plunkett. Five years later Ireland had 33 co-operatives, a number which grew to 1,114 by 1920.

Historically, the vast majority of Irish co-ops have been agricultural, and primarily dairy, co-ops.

Ireland’s entry into the Common Market prompted a major reorganisation of the sector in the 1970s. A series of amalgamations reduced the number of creameries throughout the country to less than 50.

Some 35 dairy creameries currently operate in Ireland. 13 of these are milk processers, while the remainder collect, but do not process milk.

KEY DATES:

1986Kerry Co-op, which had begun trading in 1974, becomes Kerry plc, lsited on the Irish Stock Exchange.

1990Ballyclough and Mitchelstown Co-Ops merge to form Dairygold Co-Operative Society Ltd. In May 2006, Dairygold spins off its consumer foods (Breeo), DIY (4Home) and Property (Alchemy Properties) divisions into a new company, Reox Holdings.

1990Lakeland Dairies is formed by merger of two of Ireland's oldest creameries, Killeshandra and Lough Egish Co-operatives.

1997Donegal Creameries is listed on the Irish Stock Exchange.

1997Avonmore Creameries and Waterford Co-operative, which had been established in the 1960s, merged to form Avonmore Waterford Group. The name is changed to Glanbia in 1999.