Glenboden M & A Originations

Glanbia sets a precedent for public -to -co-operative deals

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Origination Status Seller announcement, April 2010
Asset Irish dairy business of Glanbia (Ireland), leading domestic branded consumer products portfolio
Buyer Glanbia Co-operative Society (Ireland), grouping of domestic farmers
Seller Glanbia plc (Ireland), international nutrition and US cheese producer
Buyer Rationale focus on higher growth, more profitable and international businesses
Seller Rationale retaking control over businesses that ensure markets for members' milk and grains
NBs the unit being sold includes b2b dairy ingredients and feeds businesses
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The farming co-operative that owns a majority in Glanbia plc is effectively buying back the more milk- and grain -intensive part of Glanbia, allowing the latter to focus on its more 'commercial' business unfettered by the interests of its suppliers. This deal could set a precedent for other European food groups, in a very similar situation to Glanbia; we pick out Emmi and Raisio as candidates.

Co-operative to cede control of public company ...The Glanbia Co-operative Society, which owns 55% of the publicly-listed Glanbia, its to acquire the Irish dairy and agribusiness units of the latter, through a share placement plus cash component. As a result, the Society's shareholding in Glanbia will be reduced to 20%.

... separation of value -added and commodity businesses ...Glanbia's management will then be free to develop its faster -growing and more profitable global nutrition and US cheese businesses, that deliver an EBITDA margin of nearly 15%, without having to prioritise the interests of its domestic milk and grains suppliers.

At the same time, the Society and its members will take control of a business that, although delivering an EBITDA margin of under 5%, ensures a steady market for its co-operative members' output. It also frees itself from the cost pressures of being part of a publicly -listed company.

... compelling financial case ...Although in 2009 Glanbia's total revenues fell by 18%, to € 1,83 bln, its EBITDA margin grew by 80 basis points, to over 8%. That was entirely thanks to the global nutrition and US cheese businesses; the Irish dairy business' EBITDA fell by 50% in that year.

So, in 2009 Glanbia's global nutritional and US cheese business made up less than 50% of total revenues, but nearly 75% of EBITDA (see chart).

... management to focus on international growth ...Glanbia's global nutritional business provides pre-mix solutions to business customers, as well as performance nutrition direct to consumers. The US cheese business is a market leader in American -style cheddar, and buys milk on an arm's length basis from farmers.

... farmers to control their offtakersBy contrast, and although Glanbia's Irish dairy portfolio includes 7 of the top 100 domestic food brands, it's subject to the vagaries of commodity prices, especially on the feeds and ingredients side, and is beholden to its co-operative suppliers in terms of milk and grain prices.

Deal could be replicated by other groupsWe can identify very similar patterns, and potential outcomes, in other public food groups in which farming co-operatives are still majority owners. We take Emmi, the Swiss dairy leader, and Raisio, the Finnish grain and plant -based group, as good examples.

Emmi focusing on international growth ...Emmi is the biggest milk processor in Switzerland, with an international business focused on premium Swiss cheese, notably 'Kaltenbach', and fresh products like its flagship 'Caffe Latte' RTD coffee.

The group's strategy is to improve margins, hit by increased competition in its domestic market, by growing its international business to 50% of sales. However, for several years that segment has been stuck at only around 25% of total sales.

... hampered by co-operative owners ...Emmi has the financial headroom to make a breakthrough in its international business, through a significant acquisition. However, it appears that ZMP, the co-operate group that owns over 60% of the shares of Emmi plc, might be holding that back.

Emmi's acquisitions so far have been very small, in the US, Italy and Spain, with the main focus being on finding overseas distribution outlets for products made in Switzerland.

The group's latest acquisition, that of Fromalp from Hochland in 2010, is motivated specifically by the wish to boost international sales of raclette and fondue cheese made in Switzerland.

... international has higher profitability potential ...In 2009, Emmi's total sales were 2,6 bln CHF. Of that, 65% is cheese and other basic dairy products, like retail milk, cream and butter, sold mainly in its domestic market. Another 20% is fresh products, like caffe latte, yoghurt and musli-based.

In 2009, Emmi's EBITDA margin was 8%. It's highly likely that its international sales' margin was higher than that, but that the average was brought down by lower margins domestically.

... scene set for split of domestic and international unitsIt could be in the interests of both the co-operative and 'commercial' parts of Emmi, therefore, to undergo a share placement deal similar to Glanbia's.

The ZMP could regain the milk -intensive, commodity dairy businesses, and reduce its shareholding in Emmi to a minority in the process. It could enter into licence agreements, with Emmi plc, for brands like 'Kaltenbach' and 'Caffe Latte'.

Emmi plc would then become a fully -commercial and international business, free to make significant acquisition of entities, in fresh products, that have their own brands and market shares in attractive geographies.

Raisio focused on branded acquisitions ... Another group with this profile and potential outcome is Raisio in Finland. Originally a grain co-operative, it's now publicly -listed on the Helsinki Exchange, but over 60% of its shares are owned by co-operative members and the Central Union of Agricultural Producers.

Having sold its margarine business to Bunge in 2008, the group is re-inventing its brands division, which includes Benecol licencing, largely through acquisitions in fast -growth, plant -based snacking categories.

The first significant step in this strategy was made in early 2010, with the acquisition of Glisten in the UK, a dynamic group with a portfolio of better-for-you snacking brands.

... commodity b2b unit underperformingBut again, as with both Glanbia and Emmi, Raisio has another, more commodity -side to its business; feeds, malt and oil processing. As with Glanbia and Emmi, that side of the business is underperforming in terms of profitability.

In 2009, Raisio's brands division booked an 11,5% EBIT margin on € 180 mln in sales. Meanwhile, its b2b division's EBIT was 1,4% on sales of € 206 mln.

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THIS LEAD'S VALUATION
Size (€ mln) 300
Sector dairy products
Asset Quality Ireland no.1 branded
Seller large plc
Buyer co-operative
P/S 0,3
P/Ebitda 6,7
Type min. value shares and cash
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