How Glanbia might become a target after co-op deal

For Glanbia plc, which first attempted to sell off its Irish dairy and agri-businesses in 2010 to its main shareholder, Glanbia Co-operative Society, it's a case of one more time with feeling.

Formed out of the 1997 merger of two of the country's largest dairy co-operatives, Avonmore Foods and Waterford Foods, the group has long since moved away from its roots. Almost 90 per cent of Glanbia's €305 million operating profits in wholly-owned businesses came from its global performance nutrition business (GPN), which makes and sells protein shakes and bars, and its Glanbia nutritionals (GN) US cheddar cheese and value-added protein ingredients business.

The growth of both divisions was driven by a rethink a decade-and-a-half ago about what to do with protein whey, a by-product of cheese production. Filtered, dried and converted into powder, whey is the go-to supplement for gymgoers and dieters.

In the first five weeks of this year alone, GPN spent €181 million acquiring Amazing Grass, a US plant-based “superfoods” company, and Dutch sports nutrition firm Body & Fit. In the same period, the GN unit announced a 50:50 partnership with US dairy co-operatives to build a cheese and whey plant, at a cost of up to $425 million (€404.2 million).

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Deal

However, a question mark has hung over the future of Glanbia’s Irish dairy and agri-businesses since 2010, when the group attempted to sell it to the Glanbia Co-op for an estimated €340 million. The deal was shot down as support among co-op farmer members in a vote fell two percentage points short of the 75 per cent needed.

This time round, Glanbia is proposing to bundle the dairy and agri-business into a joint venture, called Glanbia Ireland, where the co-op will buy a 60 per cent stake. Crucially, a co-op vote only needs to be carried by a simple majority of members.

But Glanbia's managing director Siobhan Talbot says there are other reasons why a transaction should go through this time. Firstly, in 2012 the group managed to spin off part of the business it planned to sell two years earlier – Glanbia Ingredients, which exports milk powders, butter, cheese and whey across Europe, the Middle East and Asia – into a successful joint venture 60 per cent controlled by the co-op.

Secondly, the remaining Dairy Ireland business has benefited from €115 million of investment in recent years, while the wider dairy industry has benefited from greater clarity following the abolition of EU milk quotas in 2015, according to Talbot.

Thirdly – though Talbot doesn’t say this – it will give the co-op control over the destiny of a business that is far from the minds and ambitions of major international investors in Glanbia. (Virtually all of analysts’ questions on a conference call on Wednesday morning were about the prospects for the GPN and GN divisions.)

Venture

Glanbia Co-op chairman Henry Corbally said his members plan to expand milk supply by 30 per cent between now and 2020. The strong cash flow from Glanbia Ireland will allow it to raise bank financing for necessary processing capacity expansion without reliance on the publicly-quoted company. The new venture plans to invest up to €300 million by the end of the decade.

To sweeten the deal, the co-op plans to distribute a 2 per cent stake – the equivalent of €100 million – in Glanbia plc to members. It plans to raise a further €155 million from a share sale to finance the Glanbia Ireland stake purchase and set up a “support fund” for members. Combined, this would cut the society’s stake in the publicly-quoted company to 31.5 per cent from 36.5 per cent.

As for the plc, it plans to spend a further €300 million to €400 million buying companies this year.

However, the acquisitive company itself could become a target after getting rid of a majority stake in its legacy business.

Analysts at French brokerage BNP Paribas tipped Glanbia on Wednesday as a "once-in-a-lifetime opportunity" for Japanese food giant Ajinomoto, whose €11 billion market value is double that of the Irish company.