Glanbia sale promises to be a 'win-win' deal

12-Mar-2010 - Last updated on 12-Mar-2010 at 12:03 GMT

Analysts and industry commentators have described the mooted sale of the Irish business of Glanbia Plc to Glanbia Co-op as a ‘win-win’ deal for both parties.

Earlier this week, Glanbia announced that it was in talks with its majority shareholder Glanbia Co-operative Society Ltd about selling Dairy Ireland and other related businesses.

For Glanbia Plc, Liam Igoe, an analyst at Goodbody Stockbrokers, said a deal would be “fundamentally good news”.

Igoe said selling off Dairy Ireland would turn Glanbia into a business that is much more focused on nutritional ingredients, and at the same time, a deal would facilitate further expansion by strengthening the balance sheet.

In addition to a short term gain in proceeds from the deal that analysts predict will be more than €250m, a deal will reduce long-term debt and release working capital at Glanbia.

Igoe 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.

Acquisitions

Glanbia will be in a much better position to expand. Igoe said it is very likely that we will see Glanbia pursue acquisitions in the nutrition space over the next couple of years.

John Moloney, the CEO of Glanbia, has already 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. He added that the priority at Glanbia would be to work around global nutrition.

The sale of Dairy Ireland would also leave Glanbia with a big US cheese business but this segment is not performing as strongly as the nutrition business. In its full year results, Glanbia said revenue in US Cheese & Global Nutritionals was down 6.1 per cent with strong revenue growth in Global Nutrition failing to fully offset significant price reductions in the US cheese markets.

Farmers

Meanwhile, selling off Dairy Ireland to Glanbia Co-operative Society would leave the farmers with direct control over a business that struggled last year in the volatile dairy market.

In its financial results published this week, the company revealed that US Cheese & Global Nutritionals 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.

Igoe said the state of the diary industry last year may have pushed the farmers of the Glanbia Co-op to pursue the purchase of Dairy Ireland. He said the move will give the farmers a better focus and greater control.

Kevin Kiersey, the national dairy chairman at the Irish Farmers’ Association delivered a similar verdict. He 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.”

Glanbia Plc had originally been born out of the Co-op and was seen as a way of raising the equity necessary for farmers to find new markets for their milk. But now it appears that the interests of shareholders and farmers have diverged.

Nevertheless, Igoe said the Co-op will undoubtedly retain a certain percentage share of the Plc as an investment – perhaps in the region of 25 per cent.