Glanbia battles to be cream of the crop
The mood music surrounding Glanbia is pretty upbeat these days, and the company’s unveiling of revised proposals aimed at spinning off its domestic dairy operation should be viewed in this light.
Glanbia Group managing director John Moloney fell just short of gaining the necessary shareholder approval for his previous restructuring plan back in May 2010, but the signs are that he will get this revised proposal over the line, in the process sparking a further wave of reform in the Irish dairy sector ahead of the lifting of the EU cap on milk production in 2015.
The new dairy processing joint venture, to be known as Glanbia Ingredients Ireland, will be 60% owned by Glanbia Co-op, with the remaining 40% held by the Plc. The co-op will have the option to purchase the remaining 40%.
In turn, the shareholding in the Plc will be reduced to around 41% if the deal is voted through.
According to the Company, there is a “compelling strategic logic” to the plan which should “facilitate the expansion of dairy processing in Ireland in advance of EU milk quota abolition”.
NCB food analyst Darren Greenfield endorses the approach. In his view, the exceptionally strong performance of Glanbia Plc’s nutrition division has been hidden by volatility in the dairy side of the group’s operations.
The NCB analyst believes that the decision to expand into nutrition off the back of the group’s US cheese business has been the critical factor behind the extraordinary surge in the Glanbia share price. The share price now stands at around €6.35, giving Glanbia a market value of €1.9bn — an increase of 50% in just 12 months during what has been a period of turbulence in share markets generally.
While Glanbia still has a long way to go to match Kerry Group’s €6.7bn valuation, it is certainly beginning to move up on the rails.
Glanbia will shrink in the short term once shareholder approval is secured — assuming this is the outcome.
However, the Plc will be then much better placed for expansion, Mr Greenfield believes.
The divesting of the dairying business should free up an additional €100m in capital in his view. Moreover, it should greatly increase the visibility of the Plc bottom line following the removal of the uncertainties associated with dairy prices.
The NCB analyst believes that the current deal favours the co-op side rather more than its 2010 predecessor.
Conversely, the deal on offer to private shareholders in the Plc is less beneficial — this raises the prospect of opposition to the spin-off from among some of the shareholders.
“This time, the co-op is paying five times EBITA [earnings before interest, tax and amortisation] as against six and a half times under the May 2010 proposals,” says the NCB analyst.
A key advantage of the deal from the perspective of shareholders is that it should free up Glanbia Plc to go for a listing on the New York stock exchange, thereby putting the group on the radar screens of a much wider range of institutional investors.
This, in turn, should facilitate the management team to step up its expansion strategy at a time when valuations are considerably less stretched than they were a few years back.
According to media reports, four members of the co-op board remain opposed to the spin off — no doubt concerned at the prospect of a dilution in the co-op’s stake in the Plc.
However, the thumbs up has been provided by leading agricultural organisations.
According to Bertie O’Leary, president of the Irish Co-operative Organisation Society, “the proposed re-entry of Glanbia Co-op into processing is a progressive development”.
In his view, “making the Irish-owned milk processing operations of Glanbia more co-op oriented should enhance the possibility of a greater level of strategic collaboration between the new entity and other co-ops, something that is vital in the context of post [milk] quota expansion”.
IFA president John Bryan described the Glanbia’s proposals as “ambitious and balanced”. Mr Bryan farms in Kilkenny close to the Glanbia head office.
He too believes that the plans represent significant progress in returning dairy processing to farmer control.
The proposed reduction in the co-op stake in the Plc below 50% is preferable to the alternative of high debt levels which could result in the new entity (GII) having to dispose of assets at a later stage in less favourable circumstances, he said.
However, the IFA president stressed that the plan should be just the start of a deeper process of collaboration between Glanbia and other processors such as neighbouring Dairygold. “Farmers will not tolerate anything less than the most efficient use of their scarce resources.”
ICOS CEO Seamus O’Donoghue believes that the deal has been well structured financially. He agrees it should increase the expansion capacity of the Plc. It comes at a time when co-operation among Irish co-ops has been at a high level. Over the past three to four months, there has been a rollout of plans by a number of co-ops as the industry gears up for the removal of quota restrictions in 2015.
Mr O’Donoghue is quite upbeat about the industry response. “You can look at Lakeland, West Cork Co-op, Dairygold, Glanbia — they are all putting strategies in place. The core strategy is to position the businesses to be competitive in the global marketplace.”
Looking at the Glanbia Ingredients Ireland proposal, the ICOS chief executive considers that there is scope for other co-ops to become involved in its development at a later stage.
Looking ahead, pressures on manufacturers to achieve efficiencies will remain, but Mr O’Donoghue also envisages further moves up the value chain with new openings in R&D, marketing and sales.
For Glanbia’s milk producers, the sunny uplands beckon. Says Darren Greenfield: “Glanbia’s farmers are looking at a 60% increase in output in the next five to six years. That equates to 800 million litres at, say 30c a litre — €240m extra a year.” Glanbia is also pressing ahead with plans for a new €150m dairy processing plant in south Kilkenny.
Planning permission has been secured and work to break ground should begin in the new year, assuming that the GII joint venture gets the go ahead.
This, in turn, should result in additional revenues of €600m to €700m — a return of between €25m and €35m, assuming a profit margin of four to 5%.
A soaring share price has strengthened John Moloney’s hand considerably. The smart money must now be on the spin-off getting the go ahead, inaugurating a new era for a Plc which has begun to outgrow its roots in the sunny south east.
The idea of binding close together a North American cheese and nutritional products business with an Irish dairying operation makes less and less sense. The pair must, like two brothers, now grow apart without sundering the ties that bind them.
John Moloney: Joined Avonmore in 1987.
* Age: 57.
* Education: B.Ag Science, UCD. 1978.
MBA, 1988, NUIG (Galway).
2011: Honorary Doctor of Science, UCD.
* Career:
Civil servant — Department of Agriculture & Food.
1987: Joined Avonmore Co-op, later Glanbia.
Held number of senior management positions, including Head of Agricultural trading division, head of Food Ingredients, CEO, Dairy division.
1997: Appointed to the board of Glanbia.
January 2000: Deputy Group MD.
July 2001: Group managing director, Glanbia.
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