Although farmers could still pull the plug on the deal, shares jumped over 7 per cent yesterday as investors welcomed the move to turn Glanbia into a smaller business focused on nutrition and the US cheese market.
Under the terms of the deal, Glanbia agreed to sell its Irish dairy business to its majority shareholder Glanbia Co-operative Society for about €343m.
The farmers behind the co-op had originally created Glanbia Plc to raise the equity necessary to find new markets for their milk.
Now, through the sale of shares and €49.7m in cash, the co-op has conditionally agreed to buy the Irish dairy business and leave the Plc to concentrate on its nutrition and US cheese businesses.
Voting question mark
Joe Gill, an analyst from Bloxham Stockbrokers, said the agreement makes “perfect logical sense” for the Plc but he warned that it is not a foregone conclusion that the co-op members will approve the deal.
For it to go through, 75 per cent of members will have to agree to the plans in a 'one member, one vote' ballet, to be held in two weeks time.
Especially given how the share price has responded to the news today, Gill said farmers may question whether the agreement is as good for them as it is for the Plc.
Nevertheless, prominent members of the Irish farming community have backed the agreement. When a deal was mooted a few weeks ago, Kevin Kiersey, the national dairy chairman at the Irish Farmers’ Association said: “I see positives in this move by the Co-op because it would end Plc decision-making on the milk price, which farmers believe has not worked in their favour, and would bring under direct farmer control over 80 per cent of the national milk pool.”
Meanwhile, for Glanbia Plc the advantages of distancing itself from the Irish dairy business appear to be both significant and various.
A glance at the full year financial results published in March shows how the move would be beneficial from a margin perspective.
The US Cheese & Global Nutritionals, which is what would remain of the Plc after a deal, delivered an operating margin of 11.4 per cent on revenue totaling €792.4m, while Dairy Ireland posted an operating margin of 2.3 per cent from a turnover of €1,028.8m.
But a deal is not just a question of margins. Gill said nutrition has better growth prospects and disposing of Dairy Ireland will give the Plc the opportunity to really go after these.
If the deal does go ahead, he said we can expect to see an acquisition in the nutrition space by the end of the year.
Glanbia itself said in a regulatory statement today that for the Global Nutritionals business, which will be formally separated from Cheese after the Irish dairy sell, one of the key strategic objectives would be “continued expansion both organically and by acquisition.”
The main reason for this is that disposing of the Irish dairy business will give the company the financial freedom to grow.
In addition to a short term gain in proceeds from the deal, it will reduce long-term debt and release working capital at Glanbia.
Liam Igoe, an analyst at Goodbody Stockbrokers, explained that the dairy business is very seasonal and therefore puts a strain on working capital (current assets – current liabilities). By disposing of Dairy Ireland, Glanbia will improve its working capital position and therefore improve its borrowing capacity.
John Moloney, the CEO of Glanbia, has already made it clear that acquisitions will be a priority. In an article in the Irish Independent, Moloney is quoted as saying that the company is eyeing up a pipeline of targets overseas with turnovers in the $120m to $150m range.
Commenting on where an acquisition is likely to take place, Gill said the purchase of US-based whey and sports nutrition specialist Optimum Nutrition in 2008 is likely to be a model for future buys.