Co-op to take plunge for Kerry dairy arm, triggering more M&A
KERRY Co-op will move forward with a bid for Kerry PLC’s dairy business in a move set to trigger a break-up of the group’s consumer brands, the Irish Independent has learned.
The consumer foods division is likely to be split up after the Kerry Co-op agreed to bid for a majority stake in the dairy unit, including brands like Dairygold as well as processing capacity.
Other food brands, mainly UK-based, could now be sold separately.
The Co-op board is understood to have take a decision yesterday to move to the due diligence phase of a process to acquire a 60pc stake in the dairy arm.
The proposed deal is for the Irish-headquartered dairy business which includes not only dairy processing but valuable consumer brands such as Dairygold and Cheestrings.
That sale could “get the ball rolling” on the disposal of all of Kerry Group’s consumer foods division, according to Goodbody food and beverage analyst Jason Molins.
“The greater focus on the higher growth and higher margin Taste and Nutrition business is a more attractive proposition to investors,” he wrote in a note to clients yesterday.
Without the dairy brands, Goodbody estimates the residual value of the consumer foods business to be €650m.
Exiting consumer foods would fulfill an ambition of CEO Edmond Scanlon to transform Kerry Group into a global ingredients company, unlocking substantial value for shareholders.
It is understood Kerry Group has valued the dairy business at €800m. It has a turnover of €1.03bn and profits of around €75m.
The Co-op will have to raise €480m to buy a 60pc stake with the balance owned by the PLC.
The Co-op will have an option to buy out the remaining 40pc at a later date.
It is believed the Group is keen to sell but is insisting any deal be done without debt.
The Co-op currently has around €90m on its balance sheet to part-fund the deal. Another €125m can be raised based on a contribution of 10c/litre of milk per supplier. The remainder would come from a placement of part of the Co-op’s 12.3pc stake in the Group.
A deal of this size would require approval by Kerry Group’s shareholders.
While it is understood the Group is prepared to deal with the Co-op bilaterally, a bid could open up a wider bidding process involving third parties.
With consumer foods going in two directions, there is a question mark over the fate of the rest of the division, which includes meat brands like Denny as well as convenience foods and ready meals.
These businesses have been unofficially for sale for years, but no buyer has emerged. Hiving off the higher value brands in a dairy deal could make it an even harder sell.
Kerry is believed to value diary unit at €800m
Valeo Foods and Eight Fifty Food Group – both owned by private equity firm CapVest – have been active acquirers recently and could potentially take pieces of the group in bolt-on acquisitions, sources said.
Eight Fifty agreed to buy ham maker Carroll’s Cuisine in December, bringing sales for the group to more than €2bn. Valeo, which already owns several well-known Irish and UK food brands such as Batchelors and Kelkin, this month bought Germany’s Schuckwerder.
A trade buyer such as Greencore or McEvoy Foods could also take an interest in the rump consumer foods business, to mesh with their focus on convenience foods.
Duncan Everett left his position as head of Kerry’s consumer foods division last year to become CEO of Noble Foods in a sign that the business was facing an uncertain future.
Kerry Group is trading at a 20pc discount to its peers and shareholders would be likely to welcome any movement to re-orient the company towards the higher growth, higher-margin ingredients business, sources said.
It is understood that investors would like to see Kerry exit its lower-margin, capital-intensive businesses to realise cash for investment in growth opportunities or for capital returns.
Sales volumes for the company decreased by 4.5pc in the nine months to the end of September, with margins eroding by 130 basis points.