Business Opinion: If you set out to design a company for 21st century Ireland, it's pretty unlikely that you would lump together a breakfast meats business, several processed cheese makers, a DIY chain and a hatful of mostly small and medium-sized properties scattered across Ireland.
Unless, of course, you were the board of Dairygold Co-operative Society, which is seeking - and will in all probability get - the approval of its members to put the finishing touches to just such a mess of potage, through the demerger of some of its business.
Reox Holdings, or Red Box as the chimera will be called, is all of the above and more. Along with its rather unusual assortment of assets it will have a range of special features. These include a controlling 25 per cent shareholder in the form of Dairygold, which will have five of the nine seats on the board, including the post of chief executive, who will double-job as chief executive of Dairygold.
Red Box will have assets of €229 million and debts of €185 million, equating to net assets of €44 million, according to the pro-forma balance sheet circulated this week.
Included in its debts will be €33 million in redeemable interest-bearing bonds owed to Dairygold, that will cost around €2.5 million a year to service. The new entity is also committed to taking on unspecified new debts to fund the development of its assortment of businesses.
Dairygold will also have preferential rights to dividends from Red Box, which guarantees it the first €500,000 of any such payment.
Not surprisingly Dairygold has eschewed seeking a stock market listing for Red Box, which will be a public limited company. It will instead establish a grey, or matched bargain, market for the shares through a stockbroker. This will offer some liquidity for the Dairygold members who will initially hold the other 75 per cent of Red Box. However, the upside to the shares is severely limited by a restriction preventing anybody other than Dairygold owning more than 5 per cent of Red Box.
Red Box may be an unlovely creature with a difficult life ahead of it, but the same cannot be said of the restructured Dairygold co-operative, or Green Box as it is called. In contrast with its ugly sister, if you set out to design a modern agricultural co-op in tune with the mood of the farming community, you would in all likelihood have fetched up with something like Green Box.
It will be very tightly focused on paying strong prices for milk and giving low prices for farm inputs such as animal feed and fertiliser. It will come fitted out with a very strong balance sheet, comprising assets of €312 million and liabilities of €102 million, of which bank borrowings account for only €28 million.
Its assets will include Dairygold's core milk processing business and its agritrading operation, including some 49 properties. The cream on the cake will be Dairygold's holdings in a number of other very attractive businesses, including IAWS and FBD, which are shown on the balance sheet at a carrying cost of €2.5 million rather than market value. Collectively, the market value of these investments is €42 million.
In addition Green Box will retain Dairygold's 20 per cent stake in the Irish Dairy Board, which has net assets of €364 million. The carrying cost of this holding is €5,000.
The differing pedigrees of Green Box and Red Box are not really surprising. The board of Dairygold and its chief executive Jerry Henchy are following a pretty clear mandate from members that was gleaned over a long consultative process last year.
The overriding objective was to ensure the long-term viability of the core processing and agri-trading businesses and thus the livelihood of the farming members. Anything that was done with the non-core operations had to be ring-fenced from the core business, while not diluting the members' interests.
Henchy and his board can and do argue that while the structure they have come up with is not pretty, it fulfils their mandate.
But when you look at Red Box, it's hard to believe that there could not have been be a better way to square the circle. The alternatives are obvious and numerous and most of them centre around disposals and joint ventures. For example, rather than reinvent itself as a developer of infill sites in medium-sized towns in Munster, why does Dairygold not sell the properties?
By the same token, why invest millions and try and be a regional player in the DIY market, when builders providers are being bought for very tasty multiples by the larger chains?
The answer to this question is contained in documentation sent to Dairygold members this week. "The Red Box businesses have not yet reached their full potential and external investors coming in now would effectively be given the opportunity to buy a share in the growing business at a discount rate. It is far better to develop and grow these businesses for the benefit of the shareholders whose investment has built them in the first place," explains the document.
The decision is understandable. But if the consequence is something as unwieldy, problematic and risky as Red Box, it may turn out to have been a bit greedy.
jmcmanus@irish-times.ie
