With revenues of more than €444 million and 650 employees, the Sligo agri-business Aurivo is a key strategic player in the economy of the north-west of Ireland. Its importance is amplified by its co-operative ownership structure, with 10,000 farmers – from Co Mayo to Co Tyrone – all holding shares in the business.

Just before Christmas, however, many of those members, who supply 440 million litres of milk each year to Aurivo, received quite the shock when its longstanding chief executive resigned.

Those contacted by The Currency did not expect its top executive to leave now. Yet that is exactly what Aaron Forde did on Christmas Eve.

“Aaron Forde took the decision to step down as CEO following 16 years with the business,” a spokesman for Aurivo told The Currency.

Internal communications citing good timing for a handover of power at the employer of over 600 staff – one of the largest in the north-west – are a poor attempt at hiding the absence of an official reason for Forde’s departure.

A rushed Christmas announcement with no succession plan in place, mid-way through a five-year, €48 million investment plan intended to future-proof Aurivo’s dairy business is anything but good timing.

So just what is going on? Why did Forde call it a day mid-way through a crucial plan for the business? And what happens next?

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Profits fell last year at Aurivo, but this has been known since annual results were published in April and, as long as the bottom line is not affecting the business’s stability, it is not of much concern to the co-op’s shareholders. They essentially expect it to be run as a non-profit returning the best possible market conditions for their farms, and this is what Aurivo did in 2018. It was a bad year for agriculture, largely for weather reasons, and the business responded by topping up milk prices and importing fodder at great expense, dropping operating profit to just €3 million.

There was also recent internal restructuring that saw Eoghan Sweeney, the head of the crucial dairy ingredients and consumer foods divisions, move to rival Lakeland Dairies. Lakeland also beat Aurivo in the race to merge with another cross-border co-op, LacPatrick.

My Goodness

But talking to farmers and industry sources, the more pointed questions relate to the 2015 acquisition of My Goodness Limited, the British company behind the performance nutrition protein brand For Goodness Shakes. In February of that year, Aurivo agreed to pay €40 million for the business in an effort to hike the value of its ingredient products above that of basic milk powder. An estimated €23 million of this was to be paid the following year.

Accounts for 2016 show that final payment was, in fact, €3 million higher, bringing the total cost of acquiring My Goodness to €43 million. To pay for this, Aurivo sold its two-third share in ECC Timber Products, a sawmill in Corr na Mona, Co Galway with over €50 million in sales and €3 million in profit. The co-op also divested from a livestock breeding business.

Forde’s strategy was for Aurivo to become less horizontal in the north-west’s agri-food industries, and more vertical in the dairy value chain, following the example set by the likes of Glanbia and Kerry Group. As Glanbia found out over the past year, the performance nutrition Eldorado can be a tricky one to navigate at times. At the same time, Aurivo abandoned its butter packaging business and outsourced it to Ornua’s Kerrygold factory in Co Cork. 

On the one hand, Aurivo got €20 million for disposing of its 66.67 per cent stake in ECC, an established business from which its share of profits was worth around €2 million in previous years. ECC has since re-registered as unlimited and it is unclear how well it has done since.

On the other hand, the co-op paid €43 million for My Goodness, a company that was loss-making in the year before its acquisition. The purchase was a gamble: it valued the For Goodness Shakes brand alone at €17 million, and more than half of the agreed price was taken up by a goodwill booking of €25 million (which accounted for the entire €3 million unexpected increase in the final payment made by Aurivo). 

Goodwill as a proxy for growth

From bricks, mortar and stainless steel making up its marts and dairies, with no brand value recorded as its historic name Connacht Gold was well amortised, Aurivo’s balance sheet became suddenly loaded with intangibles and goodwill – a sign of its entry into the brave new world of global performance nutrition brands.

In this case, goodwill meant expected growth. 

Let’s consider the acquisition of My Goodness through the prism of the price/earning-to-growth (PEG) ratio, a formula commonly used by investors to assess how to price fast-growing companies. As a rule of thumb, the potential of a company is generally considered to be valued fairly when the PEG ratio is equal to one. Above this, the company is said to be expensive; under a PEG of one, the company is cheap. Another way of framing the idea is that the multiple paid for a business should be equivalent to or less than the compound annual growth rate of its profits.

PEG = (Price/EPS)/EPS growth

While My Goodness is a small company and does not publish detailed accounts, its simplified filing for 2015 shows that earnings from its profit and loss account added just under £1 million to shareholder funds while Aurivo’s Northern Ireland subsidiary booked just under £30 million for its acquisition on its balance sheet – a multiple of 30. To achieve a PEG of 1 and justify the price paid by Aurivo under this approach, My Goodness would therefore have had to grow earnings at a 30 per cent annual compound rate since the acquisition, hitting around £2 million profit last year – though detailed cash flow would ultimately decide how good an investment it is for Aurivo.

This is exactly what happened the following year: My Goodness’s 2016 filing shows a positive contribution of £1.3 million from its profit and loss account. And 2017? Back to £1 million – maybe a blip. 2018 then, according to accounts filed in October? £1 million again. In Aurivo’s latest annual report, Forde commented: “Reaping the benefits of the revamped brand, the For Goodness Shakes business reported another strong year in volume growth, with sales up 20 per cent, resulting in a very solid profitable year.”

In cold profitability figures, though, stagnation is emerging instead of promising growth – and it certainly doesn’t beat the old profits from the ECC sawmill, which is what all farmer shareholders are now talking about. 

In the absence of detailed accounts, the acquisition of My Goodness may have helped generate profits elsewhere in the Aurivo group, which don’t appear in the subsidiary’s filings. This, however, looks unlikely: The consumer foods division, along with My Goodness’s home UK market, were two of the areas where Aurivo’s sales actually dipped in 2018.

The Aurivo spokesman declined to comment on the value of My Goodness, and the co-op has not recorded any impairment on this investment beyond the drop in the sterling exchange rate observed since the acquisition – for now.