Stories
Members of Glanbia’s founding co-op are voting this Friday on a corporate shake-up that would influence the industrial and farming landscape of Ireland’s rural south and east for years to come.
The management and boards of Glanbia PLC, the US-centred high-tech food multinational, and Glanbia Co-op, the farmer organisation from which it emerged, want to untangle many of the links between the two entities and place its Irish agribusiness operations under full co-op ownership. They would have to adopt a new name different from Glanbia.
Since 2012, Glanbia Ireland, the number one milk and grain buyer and largest primary dairy processor and livestock feed manufacturer on this island, has operated as a joint venture between the co-op (60 per cent) and the PLC (40 per cent). The co-op is also the largest shareholder in the PLC (32.4 per cent) and co-op members further hold many PLC shares individually. As reported when the proposal was announced last month, Glanbia PLC would now sell its stake in Glanbia Ireland to Glanbia Co-op for €307 million.
But Friday’s special general meeting goes beyond this. Inter-related resolutions put to the co-op’s members essentially aim to re-establish the Irish-based portion of the group as a farmer-owned agribusiness capable of repeating the Glanbia success story in the future. Rather than the PLC selling its last assets in primary food and feed processing in Ireland, this can be seen as the co-op selling down its stake in the PLC (though it intends to remain a significant shareholder) and setting up a launchpad for fresh expansion from its Irish agribusiness base.
To achieve this, the deal on the table has to mean a lot of things to a lot of different people, which makes it complex. The co-op’s members present a diverse profile and a variety of opinions and priorities when it comes to their shares in the business.
The outcome of Friday’s vote, which requires a two-third majority of co-op members actively trading with the business to pass the proposals, is anything but a foregone conclusion.
*****
After a month-long (mostly online) roadshow led by Jim Bergin, chief executive of Glanbia Ireland – and of the co-op since the November 10 announcement – we know more about the proposal.
In a 46-minute video explaining the transaction, which has been watched more than 1,600 times on YouTube since December 6, Bergin said the €307 million valuation was based on a KPMG assessment of Glanbia Ireland’s balance sheet and cash flows adjusted for several factors. These included “the support the co-op would have given to Glanbia Ireland particularly in 2018 and 2019” – essentially subsidising the price of milk paid to farmers, thereby cutting input costs for the food processing business.
Allowances were also made for pension liabilities and the replacement of ageing assets, with Bergin citing the 1967 Ballyragget milk processing plant in Co Kilkenny. “The sustainability factor was taken into account,” he added, with costs expected from the application of environmental legislation introduced by the Climate Action Bill specifically referenced in the documents issued to shareholders.
To pay this price, the co-op had initially announced that it would raise debt and sell a portion of its Glanbia PLC shares, with each source of funding representing up to half of the €307 million. “Up to can be zero,” Bergin clarified when it comes to share sales. A simple look at Glanbia’s stock price curve shows this is a bad time to sell PLC shares. From highs reaching €18 on several occasions between 2015 and 2019, it halved to under €9 last year.
The PLC’s management team, led by group managing director Siobhán Talbot, has recently shown its ability to turn around the bloated performance nutrition division at the heart of Glanbia’s success, but the recovery in share price observed through the autumn has stalled since the announcement of the separation proposal, falling back to around €12 this week.
Bergin said Glanbia PLC’s share price was currently undervalued, adding: “We have until March 31 to make a decision on what the mix of debt and share sales might be and we’ll use that time to pick the best spot.”
Bergin also provided more information on the investment fund the co-op is proposing to establish. The board is seeking pre-approval from members to earmark a 4 per cent stake in PLC shares, currently worth €143 million, for sale to fund acquisition opportunities.
Bergin has now said investments would happen only if opportunities presenting equivalent or better returns to farmer members than Glanbia PLC shares were identified. “It will take us some time to identify those and we will only sell shares when we have an acquisition target and we’re pretty sure we’ll move it forward,” he said – though he must have some ideas because he hopes initial deals will close within two to three years.
There has been no official indication of the sectors the co-op could invest in next, but it was clear last month that this could happen outside Glanbia’s historic food production industry. Renewable energy seems to be an obvious target.
*****
With this additional information available, The Currency talked to a dozen Glanbia Co-op members in recent days to hear their views on the proposed deal. Five had not yet decided how they would vote. While they agreed in principle to bring Glanbia Ireland under full co-op control, another five disagreed with the terms of the deal and the timing of the meeting. Only two indicated they would vote yes.
Dairy farmer Ciarán McCabe was one of them. “In theory, it’s a good idea. In practice, farmers don’t have a great history of running things themselves,” he said, citing examples of co-op marts that have gone out of business. But he acknowledged that a professional management team could mitigate that risk. “I will vote for it,” he said, adding: “I hope the valuation is accurate.”
The deciding factor for him was the removal of a current obligation for Glanbia Ireland to return a 3.2 per cent minimum net profit margin, half of which is paid out in dividends to the co-op and to Glanbia PLC. This is widely seen among dairy farmers as a drag on the milk price paid to them at the other end of the chain. “There will no longer be a percentage for the PLC. We’re always 1 cent per litre behind everyone else,” McCabe said.
In Virginia, Co Cavan, the site of one of Glanbia Ireland’s 11 processing plants, Damien Gilsenan was voting a tentative yes – but had yet to meet with other farmers to discuss the details of the proposal to form his final opinion.
“My biggest gripe is the way Glanbia treats suppliers,” he said. “The latest thing is this peak summer supply issue.” Glanbia Ireland has re-introduced a de-facto quota system because of planning objections by environmental group An Taisce to its cheese manufacturing plant in Belview, Co Kilkenny, which was planned to absorb its suppliers’ growing peak milk production during the high-grass-growth summer months.
The Supreme Court last week reserved judgement in the case, which will now run into the New Year, maintaining uncertainty beyond Friday’s vote.
Gilsenan is not isolated in his views. For a business already majority-owned by farmers, there is a notable amount of bad blood between them and Glanbia Ireland, especially over milk prices. With 3 billion litres collected annually, the company is Ireland’s largest milk collector – but also among the lowest-paying, according to the monthly league compiled by the Irish Farmers Journal. Bergin argues farmers should look beyond this, but many don’t agree. If their business is to supply milk, milk price is what matters to them.
“Glanbia is the largest processor. Its plants are maxed out most of the year. We should be well ahead of others and more profitable,” says dairy and beef farmer Tom McCarthy.
Under the proposed transaction, Glanbia Ireland would no longer have to return a systematic 3.2 per cent profit after tax margin, but just an average 1.6 per cent to cover its own cash needs. In addition, other co-op profits, such as dividends received from Glanbia PLC and other future investments, would continue to be redirected to active farmers in the form of bonuses paid on milk and grain supplies as well as input purchases, with just 10 per cent ring-fenced to pay dividends to all co-op members.
This is where divisions emerge between farmers, leading some like McCarthy to oppose the overall deal even though they approve the principle of acquiring 100 per cent of Glanbia Ireland.
To understand their position, you need to realise that only 7,000 of the co-op’s 11,000 members are eligible to vote. They are those actively trading with Glanbia Ireland – whether selling milk or grain to its processing plants, or purchasing significant amounts of feed and fertiliser from its stores. Such active farmers own A1 shares in the co-op. If they drop below a certain activity level, for example as they retire or downsize in older age, they are temporarily relegated to the A2 class, and finally as A3 inactive shareholders. The A4 class is for corporate members.
Unless they have a designated successor on their farm, A3 shareholders cannot trade their co-op shares freely. They can surrender them for a nominal fee, but they lose the real value attached to them.
Only A1, A2 and A4 shareholders have a vote this Friday, and a majority of two thirds of them is required to pass key resolutions, such as permission for the co-op to sell down its shareholding in the PLC from the current 32.4 per cent below the existing mandated minimum of 28 per cent, and set a new floor at 17 per cent. The board has chain-linked all resolutions, so a two-third majority of members actively trading with Glanbia Ireland is effectively required for the entire deal to go through.
This leaves 4,000 less active farmers, who have contributed to the co-op at some point in their career, now without a voice in this momentous decision. McCarthy, an A1 shareholder himself, is among those who think this is unfair. “The investment fund represents 4 per cent of the PLC’s shares, but A3 shareholders have no say in it,” he says. “How will it be used? For what return?”
Edmond Phelan, a beef and grain farmer and also an A1 shareholder, is more vocal. “This is the biggest property grab since the plantation of Ulster,” he said. Phelan notes that members outside the dairy sector like himself have seen their co-op invest heavily in the modernisation of Glanbia Ireland’s milk processing capacity in recent years, and are now also asked to buy it out. “Dairy shareholders say: you put up half the money, I get all the profit,” he added.
His colleague Anthony Murphy, who sat on the representative body liaising between the co-op and farmers, has resigned over these issues.
The deal includes a sweetener for all co-op members, whatever their sector or share class. It offers them the option to convert a portion of their co-op shares into fully liquid PLC shares. Another 4 per cent stake in the PLC is earmarked for this spin-out worth €143 million. It would return nearly €10,000 to the average co-op member, according to company calculations.
Farmers like Phelan and McCarthy think the offer should be more generous towards A3 shareholders who want to get out. If the proposal is to transform the co-op from the mere investment vehicle it is today into a focused dairy processor dedicated to paying the best milk and grain price to its member suppliers rather than generating profit, then they think those who are not in this game should be given an option to get out.
Not that they would all want to – Pat Maher, a dairy farmer who owns co-op shares from his time supplying Glanbia in the past, has no vote. Yet his small shareholding returns an equally small dividend and he intends to hold on to it. “I don’t want to be forced out,” he said.
*****
With the focus among many voting members on milk price, the promise of lifting the obligation to return a profit and pay dividends to the PLC may trump all other considerations and push the decision through. The recent clarification that the co-op was not set on selling down its PLC stake at Glanbia’s current poor stock price also seems to have increased momentum in favour of the proposal.
The Irish Creamery Suppliers Association (ICMSA) has recommended a yes vote and the organisation “now believes that sufficient flexibilities are available to the co-op in terms of funding the proposal and taking account of stock market developments,” its president Pat McCormack said on Wednesday. The organisation’s support is, once again, based on the promise of more value being returned through higher milk prices.
Yet other members express disappointment that so many other aspects of the far-reaching proposal are not being debated properly – especially as Friday’s special general meeting is held online under exceptional Covid-19 company legislation. “I’m not afraid to ask questions at a meeting. But in front of a computer, I’m illiterate,” says Michael Veale, an A1 shareholder who breeds horses and Angus cattle and grows forestry.
McCarthy adds: “It’s like holding a general election at the moment, when people can’t go to vote. There would be a revolution. What’s the rush?”
The vote, however, is going ahead. If approved by the co-op on Friday, rubberstamping by other PLC shareholders in the New Year will be a formality.
The Irish Farmers’ Association, which has stronger representation than the ICMSA in Glanbia’s catchment, has not taken a position in favour or against the deal. Its deputy president Brian Rushe, a dairy farmer in Co Kildare but not a Glanbia member, attended an online meeting of over 300 farmers this week over the issue.
“Farmers are asking very valid questions,” he said, citing governance of the new business, its future relation with the PLC and the timing of spinning out Glanbia stock in light of stock price fluctuations. “If Glanbia Ireland returns to full co-op ownership, it has to deliver on milk price,” he added.
As they vote on Friday, 7,000 co-op members will have many more eyes set on their decision, including those of Glanbia Ireland’s 2,100 employees. “If you look at the milk pool, it’s a huge driver of the economy across the region,” said Rushe.
