In the middle of a COP26 climate conference where the Irish government joined a global pledge to cut methane emissions by 30 per cent (but failed to indicate clearly in its national Climate Action Plan how much methane-emitting livestock farming was expected to contribute to this), Glanbia has just announced its full divestment from Irish dairy.

Not only is the Kilkenny-headquartered food processor proposing to sell its remaining 40 per cent share in Glanbia Ireland, the milk processing joint venture it co-owns with the group’s founding farmers’ co-op; Wednesday’s stock market announcement adds that “Glanbia Ireland and the co-op will change their respective names following a transitional period post completion to names which do not include ‘Glanbia’”.

If shareholders approve the deal in the new year, there will no longer be a cow in Ireland milked in the name of Glanbia – currently the country’s largest dairy processor. This also means the PLC’s brand will fade away from protracted litigation by environmental group An Taisce against the development of a new cheese factory by Glanbia Ireland and its Dutch partner Royal A-Ware.

Glanbia grew into an international success story by turning whey, a protein-rich by-product of cheese production, into valuable health and sports nutrition products. The model ran into trouble in 2019, when acquisitions and runaway growth in those new markets left the group creaking under the weight of multi-layered ranges and supply chains. 

The management team led by Siobhán Talbot has since turned it around, restoring the flagship Glanbia Performance Nutrition (GPN) division to its former glory. Having upgraded its 2021 guidance at the half-year mark to an increase of 17 to 22 per cent in earnings per share, Glanbia added in quarterly results on Wednesday that it was now heading for the upper end of that range. 

Strong recovery more remote from dairy

As recovery from the pandemic takes hold, performance nutrition is again driving the business. Its revenue grew by 23 per cent in the first nine months of 2021 compared with the same period last year, pulled forward by brands like SlimFast and Optimum Nutrition. The so-called nutritional solutions division, which sells increasingly high-tech ingredients to other manufacturers, is also posting strong growth.

The new reality, however, is that these profit centres no longer depend on the primary dairy business from which they emerged in the first place. When inflation started to bite in August, Glanbia’s financial director Mark Garvey answered a question on the sourcing of all-important whey on an investor call:

“We pretty much work at market pricing from a GPN perspective, whether we’re buying that from an internal Glanbia Nutritionals business or whether we’re looking at that externally, so there’s not really any difference substantially. You could argue that there is a benefit in having security of supply to the extent that things may get a bit tight in the market, and that’s obviously beneficial from time to time, but not necessarily from an overall pricing perspective.”

Glanbia is also happy to supply those health and fitness enthusiasts who want their superfoods and protein snacks plant-based. In 2017, it paid well over €100 million to acquire Amazing Grass, a US vegan supplement manufacturer. Now the group’s leading Optimum Nutrition brand is moving into the dairy-free market too.

As environmental scrutiny becomes a standard feature of stock markets, the listed company can now leave the thorny business of reducing greenhouse gas emissions to the farmer-owned co-op while continuing to source ingredients from it at arm’s length. Asked about this challenge by The Currency, both organisations stressed that they had set their separate climate targets before the deal was announced.

Could this mean a similar fate for Glanbia’s joint ventures in the US, where it has invested heavily with local co-ops to collect and process milk? Not so, a company spokesperson told The Currency, adding that the Glanbia Ireland deal was considered on its own merits, while American partnerships remain “strategic.” “The proposed transaction would have no impact on the PLC’s carbon reduction strategy or our overall sustainability targets,” the spokesperson said. “The PLC’s sustainability targets include our US JVs.”

From the co-op’s perspective, the deal offers farmers an opportunity to take full control of all industrial processes taking place in Ireland, from milk and grain purchases from their farms to their transformation into feed, basic ingredients such as cheese, butter and milk powders, and domestic consumer products including the Avonmore brand. These functions occupy 2,100 employees in Ireland and generate €1.9 billion in revenue. Glanbia Ireland also comes with the group’s stake in Ornua – where it is the largest shareholder at over 20 per cent – and its global Kerrygold brand.

The co-op could run this business outside Glanbia Ireland’s current obligation to return a profit after tax equal to 3.2 per cent of revenue and pay half of this in dividends. Last year, this meant the joint venture distributed over €12 million to the PLC out of its €61 million net profit. Under full co-op ownership, the dairy processor could retain this value and use it to pay higher milk and grain prices or dividends to farmers, like other farmer-owned processors do.

With the principle of a co-op takeover of Glanbia Ireland in the works for several months, the two sides had to agree financial terms. Glanbia PLC was advised by Credit Suisse and the co-op by KPMG. Wednesday’s announcement puts a price of €307 million on the PLC’s 40 per cent stake in Glanbia Ireland. 

The net price will be lower – around €285 million – because Glanbia has agreed to cover €8 million in pension, separation and rebranding costs and to give up this year’s dividend from Glanbia Ireland, which the co-op estimates to be worth €14 million – as well as any 2022 dividend arising until the deal closes. 

The co-op is planning to borrow half the acquisition’s cost. This may come from banks or from the bond market, where it raised €100 million at a cheap 1.375 per cent rate in 2016 with a debt issue backed by its holding in the PLC. The co-op will fund the other half by selling Glanbia shares equivalent to a 4 per cent stake. In parallel, Glanbia has committed to using half of the proceeds from the transaction to repurchase stock equivalent to that sold by the co-op.

Although the company spokesperson said the two planned share transactions were different and would not necessarily match, Talbot did link the two: “The capital received from the transaction is likely to be deployed in a mix of investment to drive further growth and the return of capital to shareholders. This approach is aligned with the intention of the co-op to fund up to 50 per cent of the acquisition by the placing of PLC shares,” she told an investor call on Wednesday.

Separately, the co-op is planning to “spin out” another 4 per cent of Glanbia’s share capital to its members. Interested farmers would cancel some co-op shares and receive PLC shares instead. After all this, the co-op’s shareholding in Glanbia would fall from 32.4 per cent today to around 24 per cent, with another 4 per cent earmarked for potential sale in an “investment fund”.

This fund represents the farmers’ ready-to-use war chest as they soldier into a brave new world without Glanbia. The Currency understands the co-op is quite open to diversification outside food processing if an investment offers farmers the prospect of a good return. If they use the fund, the co-op’s shareholding in the PLC will drop to 20 per cent. This also means the co-op will collect smaller dividends from Glanbia in the future. The typical €24 million annual distribution it received in recent years would fall to €17.3 million after the proposed transaction, and €14.4 million if the co-op sold down its stake further to deploy its investment fund.

A benchmark for Kerry

The deal has yet to obtain the green light from shareholders in both organisations. But it already offers indirect lessons for another set of dairy farmers and food processing executives – those of Kerry Group.

Kerry was planning to sell the majority of its Irish dairy processing and agribusiness to its founding farmer co-op until talks collapsed in the spring when the two sides failed to agree on a price. Since then, Kerry Group has sold its prepared meats and meals business, clarifying what exactly remains to be sold. 

Now the price agreed between Glanbia PLC and Glanbia co-op for its equivalent business in the south and east sets a benchmark for their counterparts in the west. 

There are many ways of valuing a company. In the case of Glanbia Ireland, the agreed €307 million consideration for a 40 per cent share is equivalent to a valuation of €767 million for the entire business. Net of the €8 million contribution to costs and €14 million dividend foregone by Glanbia PLC, the valuation is still over €700 million.

As a multiple of the business’s profitability, Talbot noted that the deal would get Glanbia PLC 12 times its share of Glanbia Ireland’s latest profit after tax.

These are the figures Kerry Group and its shareholder co-op will now have in mind if they revive negotiations for a similar spin-off. Unlike Glanbia Ireland, the Irish agribusiness division of Kerry Group doesn’t report separate accounts, so we can’t propose a valuation based on Glanbia’s benchmark – but the negotiators with access to the data room now can.

As I previously wrote, however, we know that Kerry collects 1.2 billion litres of milk – less than half of Glanbia’s nearly 3 billion. Although its operations certainly carry less debt than Glanbia’s, having expanded less aggressively in recent years, the rumour of a €480 million external offer for 60 per cent of Kerry’s Irish dairy business leaked at the start of this year now looks even more unrealistic.

It would value Kerry Agribusiness at €800 million, well over the price now agreed for Glanbia Ireland – for half the size.