June 27, 2012
Glanbia is negotiating deal which could reduce its stake in its Irish dairy processing business to 40%, while allowing the division to take advantage of the Irish milk production boom expected, following market reforms.
The cheese and ingredients group said it was in talks with its biggest shareholder, the Glanbia Co-operative Society, over spinning off the processing business, Ireland's biggest, into a joint venture.
The tie-up, owned 40% by Glanbia and 60% by the co-operative, would gain the "flexibility" to tap into increased Irish dairy volumes expected after the EU in 2015 abolishes quotas on milk output.
However, it would reduce Glanbia's exposure to a business whose relatively low profitability contrasts with the group's aim of seeking growth in markets, such as sports drinks, in which it can make higher margins.
"Considerable progress" had been made over the deal, with Glanbia finalising terms on a deal to buy a site for a fresh processing plant in County Kilkenney in south east Ireland from the country's industrial development agency.
However, the group, which had hoped that a deal would be concluded by the end of this month, said it now looked like discussions with the co-operative would not be finished "before the end of August".
While further details of the deal were not revealed, broker NCB said that a transaction would need approval of 75% of the co-operative's members.
It was this stage which scuppered Glanbia's 2010 plans to sell the dairy division to the co-operative, which in return would make a big sell-down in its majority stake in the group, with 73% of society members backing the scheme, just short of the target.
NCB welcomed the latest proposal, saying a deal would be "positive", and restating a "buy" recommendation on Glanbia shares.
"It reduces Glanbia's exposure to the dairy commodity cycle, reduces the required investment in the low margin dairy business, and allows the company to focus on investment in expanding its nutritionals business globally," the Dublin-based broker said.
At rival Davy, analyst John O'Reilly termed the proposal "pragmatic", and restated an "outperform" rating on Glanbia shares.
"The opportunity loss of [Glanbia] having to invest in new milk manufacturing capacity in Ireland to cater for a post-quota increase in milk volume - bearing in mind that it would take some years for new capacity to become profitable - will be avoided," O'Reilly said.
Glanbia shares closed unchanged at EUR5.50 (US$6.87) in Dublin.
O'Reilly added that the joint venture would have "an opportunity to uniquely focus on, and invest for, the medium-term organic growth prospects within Irish milk, which the 2015 abolition of the EU milk quota is expected to create".
He added, "It can also participate in what may be (and what many would like to see) a consolidation of the Irish milk processing sector."
Ireland's warm and wet climate - comparable to that in parts of New Zealand, the top dairy exporter - are expected to leave the country's dairy farmers well placed to use the EU liberalisation as a chance to raise milk production.
Glanbia itself said in February that "Ireland has a range of competitive characteristics that facilitates growth in milk supply post 2015".
Dairy rival, Irish Dairy Board, has said it will use extra Irish milk production as an opportunity to boost export volumes of its products, such as Kerrygold butter, and earlier this month, sold a Belgian cheese packaging business to raise funds for its expansion plans.
