Denis Brosnan, the storied former chief executive of Kerry Group, was barely exaggerating when he said this weekend that there would never be a wealth creation event in Ireland to rival the sale of Kerry Co-op’s stake in Kerry Group. In the Irish context, it is hard to think of another example where passive small shareholders have done so well as the 12,000 or so members of Kerry Co-op who effectively cashed out their shares in Kerry Group on Monday.
Some €1.4 billion worth of Kerry Group shares will be distributed directly to members pro-rata to their holding in the co-op. They will each get an average of about €120,000 worth of shares. The balance will be used to buy Kerry’s milk processing business, Kerry Diary Ireland, which processes most of the co-op members’ milk.
For co-op members who have been around since the inception of Kerry Group, the gains are eye-watering. The co-op’s initial investment in 1974 in the group of assets that would become Kerry Group was €1.5 million.
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Kerry Group floated on the Irish Stock Exchange in 1986 at 52p (66.5 cent). Its biggest shareholder was Kerry Co-op, which had folded all its business and assets into the listed group. It held a 90 per cent stake.
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It would be a laborious task to work out just how much money the co-op members made out of its investment but suffice to say that the 90 million shares it held in 1986 were worth €60 million. At Monday’s prices, its stake was worth €1.7 billion. It is almost a twentyfold return on the flotation price and a 1,400-fold return on the initial investment in 1974, before considering any pay days and dividends along the way.
The icing on the cake for the co-op shareholders is that they are going to get their Kerry shares tax-free. According to the co-op, the transaction is a “a tax-neutral share for share reorganisation”. The co-op members will only be liable for capital gains tax when they sell the Kerry Group shares they receive.
It is tempting to see Monday’s event as some sort of windfall for a group of farmers and their descendants who enjoyed a free ride as Kerry Group’s management, led by Brosnan and his successors, set about creating enormous value.
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To do so would be to underestimate the role of the co-op whose shareholding did not fall bellow the controlling level of 50 per cent until 1996. It did not fall bellow the 30 per cent level that allowed it to block some board decisions until 2006.
Like most co-ops, Kerry has a large board – currently19 members – who are elected on a regional basis. The co-op has nine regions which all in turn have their own advisory committees that are made up of dozens of farmers.
Only the current or former milk suppliers to the co-op have voting rights. They account for roughly half of the members of the co-op. The remaining members – who by and large inherited shares or bought them on the grey market – don’t have voting rights.
It is not a particularly democratic system, but it is one that creates a board whose interests are aligned with those of the actively farming members whose fortunes ebb and flow with the price of milk. As such, it could be expected to be both conservative and short-term in its thinking.
However, the board of the co-op in its various iterations endorsed several radical pivots by Kerry Group under Brosnan, the most significant being the reinvention of the business as supplier of food ingredients to food manufacturers on a global scale.
Their willingness to back Brosnan may have been driven to a certain extent by necessity, as margins were squeezed in traditional markets but it was rewarded by success creating a virtuous circle.
Something similar happened at Avonmore Co-op under Pat O’Neill, which entered the North American cheese market before merging with Waterford Co-op to become Glanbia. Likewise, IAWS under Phillip Lynch which pivoted into frozen bakery products. All three placed bets outside of the business core areas of expertise which paid off.
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IAWS’s subsequent future was more mixed, but it lives on as the listed company Origin Enterprises. Kerry Co-op and Glanbia Co-op (renamed Tirlán) are both back where they started, having divested of the listed businesses that grew out of them and bought back their Irish milk-processing business. Tirlán retains a €28.9 per cent stake in Glanbia but members recently voted for rule change that will allow the shares to be spun out to them.
The interesting question is whether these two co-ops have the appetite to do it all again. They certainly have the wherewithal with access to an investor base – in the form of members who have cashed in shares – that most start-up businesses could only dream of. The apparently clumsy and conservative co-op governance structure has shown itself to be surprisingly effective.
The imperative for them to look beyond the traditional milk-processing business is stronger than ever. Margins are tight, competition is intense and the need to curb greenhouse emissions adds further pressure.
What’s missing – or has yet to show their hand – is the next Brosnan, O’Neill or Lynch.
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