Glanbia plc (“Glanbia”), the global nutritional solutions and cheese group, announces that a non-binding Memorandum of Understanding has been signed with its majority shareholder, Glanbia Co-operative Society Limited (the “Society”), subject to contract and approvals, to enter into a 40 percent (Glanbia): 60 percent (Society) joint venture in respect of Dairy Ingredients Ireland. Separately, but related to the joint venture, the Society has announced that it intends to seek Society member approval to reduce its shareholding in Glanbia to 41.4 percent.
Irish dairy processing joint venture
The proposed joint venture incorporates the business and assets of Dairy Ingredients Ireland (“DII”), a business unit of the Dairy Ireland division of Glanbia, including its 45 percent share of the Corman Miloko Ireland JV and its 23 percent shareholding in the Irish Dairy Board. Under the proposed transaction, the new joint venture, to be known as Glanbia Ingredients Ireland (“GII”) will be 60 percent owned by the Society and 40 percent owned by Glanbia. The business, net fixed assets, working capital and liabilities of DII will be transferred to the joint venture, which will also assume the relevant pension obligations of DII.
The existing DII business is the largest dairy ingredients processor in Ireland, assembling a milk pool of 1.6 billion litres and processing it into c.180,000 tonnes of dairy ingredients largely for export to over 50 countries worldwide. In 2011, DII generated revenue of €738 million, operating profit of €33 million and EBITDA of €44 million. As at 31 December 2011, DII had gross assets of €313 million.
There is a compelling strategic logic for the creation of the joint venture for both parties as it facilitates the expansion of dairy processing in Ireland in advance of EU milk quota abolition in 2015, while also ensuring that Glanbia’s financial resources are directed towards business segments that deliver the highest return on capital for all shareholders. The opportunity to expand milk production is underpinned by a positive long-term outlook for global dairy markets and the comparative advantage that Ireland enjoys as a grass-based system. It is envisaged that GII will seek to increase existing peak dairy processing capacity by up to 60 percent; a total investment programme of €180 million to 2020. Planning permission is progressing for a new greenfield facility at Belview, Co. Kilkenny. The Board of GII will reflect the relative shareholding of the joint venture partners and the existing management will remain in place. The financing of GII will be independent of the joint venture partners.
The parties have agreed a €20 million discount to the carrying value of the fixed assets which are the subject of the transaction. Based on balances as at 31 December 2011, this would equate to a fixed asset valuation of €90.4 million. For transaction purposes, the pension deficit has been valued at €16.3 million. The consideration payable will reflect any movements in asset values up to completion. Based on the numbers above, the agreed valuation would be €74.1 million and the Society would acquire a 60 percent shareholding for €44.5 million. The consideration payable to Glanbia will be satisfied by cash and a loan note from the Society.
In addition, GII will acquire the working capital balance of DII at completion. In 2011, DII had average working capital of €112 million. GII will pay Glanbia in cash for the working capital by 31 December 2012 or, if later, at completion.
The pension deficit under an IAS 19 accounting basis was €11.4 million as at 31 December 2011 (30 June 2012: €34.7 million). The cash flow requirements for the pension scheme remain unchanged as the scheme remains on target to meet the funding position agreed with the Irish pension regulator.
The proceeds from the sale of the 60 percent shareholding and the release of working capital will be used to repay existing bank facilities. The transaction is not expected to have a materially dilutive effect on the adjusted earnings per share of Glanbia. The parties have agreed to provide equity of €29.6 million to GII at completion, in proportion to their respective shareholdings. The Society will dispose of shares equal to 3 percent of the issued share capital of Glanbia to fund its equity investment. The remainder of the proceeds from the share sale will be applied to part-fund the acquisition of its 60 percent shareholding in GII from Glanbia. The balance of the consideration will be discharged by an interest bearing loan note issued by the Society to Glanbia repayable over 10 years from completion.
The Society will have a call option exercisable within a six year period post completion to acquire Glanbia’s remaining 40 percent interest in GII. The price payable by the Society on completion of the call option shall be an amount equal to 40 percent of the higher of:
- the audited book value of the net assets of GII as at the year end prior to the date of exercise of the call option; or
- 5.5x 12 months audited EBITDA of GII (calculated as the average of the last 3 financial years prior to the exercise of the call option). The equity consideration under this formula will be on a debt-free, cash-free basis and assume a normalised level of working capital in GII.
For Stock Exchange Listing Rules purposes, it is necessary to cap the total consideration which may be payable in respect of a disposal of DII (i.e. being the initial 60 percent sale to the Society and the further sale of the remaining 40 percent on the exercise of the call option by the Society). This is a technical requirement and is not intended as an estimate of the total consideration likely to be achieved. This figure has been capped at €425 million.
Separately, but related to the joint venture transaction, the Society has today announced that it is seeking approval from its members to reduce its shareholding in Glanbia to below 51 percent. Subject to approval, the Society will dispose of shares equal to 3 percent of the issued share capital of Glanbia (in addition to the 3 percent disposal relating to the Joint Venture) and distribute a further 7 percent of the share capital to Society members. This will result in a reduction in the Society’s shareholding in Glanbia from 51.4 percent to 41.4 percent. In that instance, the Society will retain a majority representation on the board of the plc for five years, reducing to eight board members by 2018.
If the sale and distribution of shares is approved, the parties to the joint venture transaction will inject an additional €29.6 million in equity into GII in proportion to their respective shareholdings. This will bring the total equity investment in the joint venture to €59.2 million. In these circumstances, the consideration payable by the Society to Glanbia for the 60 percent joint venture interest will be discharged by cash, with no requirement for a loan note.
Approvals and conditionality
The Society’s Board has decided to seek the approval of its members by a simple majority for the joint venture transaction. The reduction in the shareholding below 51 percent will require 75 percent votes in favour at two special general meetings of the Society. Approval to reduce the Society shareholding to below 51 percent is firstly contingent on the joint venture transaction being approved. If the joint venture transaction is not approved neither proposals will proceed. It should also be noted that the greenfield plant at Belview, Co. Kilkenny is contingent on the approval by Society members of the joint venture transaction.
In addition, as the joint venture transaction is between related parties it will require the approval of Glanbia shareholders at a general meeting, excluding the Society and its associates. A circular will be issued to Glanbia shareholders in due course, which will set out the details of the transaction and provide notice of the meeting. Subject to completion of legal contracts and receiving the necessary approvals, the transaction is expected to complete before the end of 2012.
John Moloney, Group Managing Director of Glanbia plc said:
“The proposed joint venture offers a compelling proposition for all stakeholders for the longer-term as it facilitates the desired expansion of dairy processing by Society members and allows Glanbia to continue to focus on its successful international growth strategy. The abolition of EU milk quotas in 2015 will initiate a new era for milk production and offers increased prospects for the Irish dairy industry through a clear opportunity to expand milk supply. Glanbia already has a number of successful international dairy joint venture operations in the UK, USA and Nigeria.”