Glanbia plc announces it has signed binding legal agreements to sell 60% of Dairy Ireland. On 26 April 2017, Glanbia plc (‘Glanbia’ or the ‘PLC’) and Glanbia Co-operative Society Limited (‘Glanbia Co-op’ or the ‘Society’) have today announced they have signed binding legal agreements, subject to certain approvals and conditions, for the sale of a 60% interest in Glanbia’s Dairy Ireland segment to Glanbia Co-op (the ‘Proposed Transaction’). Dairy Ireland is currently 100% owned by Glanbia plc and is comprised of two business units, Glanbia Consumer Foods Ireland and Glanbia Agribusiness.
Commenting today, Siobhan Talbot, Group Managing Director of Glanbia said:
‘I’m pleased to announce that Glanbia has signed binding legal agreements, subject to certain approvals and conditions, to sell a 60% interest in Dairy Ireland to Glanbia Co-op. This strategic initiative remains on track to be completed by mid-year. Once completed it is planned to integrate Dairy Ireland with our Associate, Glanbia Ingredients Ireland DAC to form ‘Glanbia Ireland’, which will be a leading Irish food business. This will bring together Glanbia Group’s Irish dairy and agri-businesses under single ownership and will enable Glanbia to continue to focus on its two growth platforms of Glanbia Performance Nutrition and Glanbia Nutritionals.’
In 2012, Glanbia and its largest shareholder, the Society established Glanbia Ingredients Ireland DAC (‘GIID’) as a dairy processing joint venture which is owned 40% by Glanbia and 60% by the Society. On 22 February 2017, Glanbia announced that it had agreed a non-binding memorandum of understanding with the Society, subject to contract and certain approvals, to dispose of 60% of Glanbia Foods Ireland Limited (‘GFIL’) and related assets (together ‘Dairy Ireland’) to the Society. Dairy Ireland is currently 100% owned by Glanbia and is comprised of two business units, Glanbia Consumer Foods Ireland and Glanbia Agribusiness. Prior to completion of the Proposed Transaction (‘Completion’), a corporate restructuring will take place to ensure that all of the assets related to the two business units are transferred to GFIL. The Society will acquire the 60% interest in Dairy Ireland indirectly by investing further in GIID which will acquire 100% of GFIL from Glanbia (‘the Proposed Transaction’).
After Completion of the Proposed Transaction GIID will be owned 40% by Glanbia and 60% by the Society and will be known as Glanbia Ireland. While this is the same percentage shareholdings that each company currently holds in GIID, it represents an expansion of this existing joint venture since it will encompass the existing businesses of GIID and Dairy Ireland, including Glanbia Consumer Foods Ireland and Glanbia Agribusiness.
As the Society is deemed to be a substantial shareholder in Glanbia for the purpose of the listing rules of the Irish Stock Exchange and UK Listing Authority (the ‘Listing Rules’), the Proposed Transaction is classified as a related party transaction under the Listing Rules and is subject to, and conditional upon, the approval of the shareholders of Glanbia, other than the Society or persons connected with the Society (‘Independent Shareholders’). The approval of Independent Shareholders for the Proposed Transaction will be sought at an extraordinary general meeting of Glanbia (the ‘EGM’), details of which will be included in a circular (the ‘Circular’).
The Proposed Transaction is also subject to certain other conditions, which are summarised in this announcement. Further details on the terms and conditions of the Proposed Transaction will be included in the Circular to be published shortly.
Background to and reasons for the Proposed Transaction
The Board believes the Proposed Transaction to be in the best interests of Shareholders as a whole as it:
· will allow Glanbia to continue to focus on its global nutrition strategy through the platforms of Glanbia Performance Nutrition (GPN), Glanbia Nutritionals (GN) and Strategic Joint Ventures for the benefit of all shareholders;
· creates an integrated Irish-based business of scale which is the largest dairy processor in Ireland;
· builds on the successful partnership of Glanbia and the Society when GIID was created in 2012;
· creates one integrated organisation to maximise opportunities from anticipated growth in Irish milk supply;
· envisages the investment of €250 million to €300 million in a strategic capital investment programme in GIID in the period 2017 to 2020. This investment programme is intended to increase capacity to support the stated growth ambitions of the GIID milk suppliers and optimise value-adding opportunities. The financing of the investment will substantially be sourced from dedicated bank facilities in GIID; and
· will reduce Glanbia’s working capital funding requirements.
In making its recommendation, the Board has considered the following potential risks as being the material risks associated with the Proposed Transaction and having assessed these risks, it concluded that they are significantly outweighed by the anticipated benefits:
· as a minority shareholder, Glanbia will have less influence on the activities of Dairy Ireland than is currently the case;
· while a business plan has been agreed for GIID which provides a new minimum profit policy for the enlarged business, there can be no absolute certainty that GIID will achieve the level of profitability envisaged by this business plan;
· as the minority shareholder in a joint venture, Glanbia’s shareholding in GIID will be illiquid and its ability to realise value for this shareholding will be constrained; and
· as Glanbia’s largest shareholder, there is a commonality of interests between Glanbia and the Society, but this would not be the case if the Society were to substantially reduce its shareholding in Glanbia.
Information on Dairy Ireland
Dairy Ireland is currently a wholly owned segment of Glanbia. As of 31 December 2016, Dairy Ireland had gross assets of €307.4 million. In 2016 Dairy Ireland delivered revenue of €616.2 million, earnings before interest, tax and amortisation (‘EBITA’) of €30.7 million and an EBITA margin of 5.0% . Dairy Ireland, which accounted for 10.1% of Glanbia’s wholly owned EBITA in 2016, has two main businesses, Glanbia Consumer Foods Ireland and Glanbia Agribusiness including associated investments. Glanbia Consumer Foods Ireland is a leading supplier of branded consumer dairy products to the Irish market, as well as an exporter of long-life consumer dairy products. Glanbia Agribusiness supplies inputs to the Irish agriculture sector and is the leading purchaser and processor of grain and is a large-scale manufacturer and seller of branded animal feed in Ireland. Dairy Ireland also has holdings in a number of entities involved in primary manufacture and distribution of farm inputs. All of Dairy Ireland’s manufacturing operations are based in the Republic of Ireland.
The pension obligations associated with the Dairy Ireland businesses are included in the Proposed Transaction. On an IAS 19 basis these obligations amounted to approximately €54 million as at 31 December 2016. As at the most recent reporting date of 31 December 2016, the relevant pension schemes met or remained on target to meet the statutory minimum funding standard in accordance with funding proposals agreed with the relevant trustees and accepted by the Pensions Regulator in Ireland. After Completion, Glanbia will continue to be the principal employer of the defined benefit pension schemes associated with Dairy Ireland. GIID and GFIL, as participating employers of the defined benefit pension schemes associated with Dairy Ireland, will also become jointly and severally responsible for funding the pension obligations associatedwith thedefined benefit pension schemes of Dairy Ireland.
Under the Proposed Transaction, the Society, through its shareholding interest in GIID, will indirectly acquire a 60% interest in Dairy Ireland. In return, Glanbia will receive €112 million together with an amount equal to 100% of the amount of the working capital in Dairy Ireland at Completion (these two payments are referred to as the ‘Transaction Proceeds’). The average 3 year working capital in Dairy Ireland over 2014, 2015 and 2016 was approximately €92.5 million. To the extent that the working capital balance at Completion is higher or lower than the average three year working capital, the payment in relation to working capital will be based on the actual balance at that time. While the basis for determining the amount of working capital of Dairy Ireland has been agreed by the parties, the exact amount will not be known until after Completion as the Transaction Proceeds are subject to adjustment by reference to the completion accounts.
GIID’s acquisition of Dairy Ireland will be effected by way of a subscription for new shares in Dairy Ireland followed by a redemption of shares currently held in Dairy Ireland by Glanbia together with a sale of certain properties and investments directly to GIID. The Transaction Proceeds to be paid to Glanbia by GIID will be funded by a subscription by the Society of €112 million for new equity in GIID and by GIID financing the payment for working capital with additional debt facilities to be arranged prior to Completion. The Proposed Transaction is therefore conditional on these additional debt facilities becoming available. The payment of €112 million will occur at Completion and the payment for the working capital of Dairy Ireland will be made in full within three months of Completion subject to successful agreement of completion accounts.
As part of the Proposed Transaction, the existing Shareholders’ Agreement will be replaced so that the Society will now also have an option in the event of a change of control of Glanbia to acquire the remaining 40% shareholding in GIID. Should the Society exercise this option, Glanbia would no longer be a shareholder in GIID.
Funding of Transaction Proceeds
The Society will fund its subscription of €112 million for new equity in GIID from its existing resources which will include the placing of some of the shares it holds in Glanbia up to 2.05% of the entire issued share capital of Glanbia (the ‘Placing by the Society’). GIID will have to arrange additional debt facilities in an amount not less than €100 million in order to fund the remainder of the Transaction Proceeds.
Use of proceeds and financial effects of the Joint Venture
The proceeds from the Proposed Transaction will be used for general corporate purposes, including the repayment of indebtedness related to recent acquisitions which were completed and announced in the first quarter of 2017.
As Completion is currently expected to take place in July 2017, the Proposed Transaction would therefore be reflected in the Group’s accounts for the financial year ending 30 December 2017.
Post completion of the Proposed Transaction, Glanbia will account for its interest in GIID, including Dairy Ireland, using the Equity Method, recognising its share of the entity’s results through the Group income statement. As the earnings of Dairy Ireland will no longer be consolidated with the earnings of Glanbia post Completion, the Proposed Transaction is expected to be 5% to 7% dilutive to the adjusted earnings per share (‘Adjusted EPS’) of Glanbia on a full year pro forma basis in 2017.
Possible share sale and spin out by the Society
As mentioned above, the Society is the largest shareholder in Glanbia with a 36.5% shareholding. The Society has announced that it is seeking approval from its members to a rule change allowing the Board of the Society the discretion to further reduce the Society’s shareholding in Glanbia to 28%. If the rule change is approved the Board of the Society will place an additional number of shares equal to 0.95% of the issued share capital of Glanbia and also make a distribution of Glanbia shares to the members of the Society equivalent to approximately 2% of the issued share capital of Glanbia.
Under the Society’s rules, the reduction in the Society shareholding in Glanbia below 33% will require a two-thirds majority vote in favour. Seeking approval for the Board of the Society to have the discretion to reduce the Society’s shareholding to below 33% is contingent on the Proposed Transaction being approved. If the Proposed Transaction is not approved the shareholding reduction proposal will not proceed. However, the Proposed Transaction can still proceed even if the proposal to reduce the Society’s shareholding below 33% is not approved by the members of the Society.
If all of the proposals above are approved and fully executed the Society would own approximately 31.5% of the issued share capital in Glanbia.
Glanbia Board composition
There are currently two vacancies on the Board of Glanbia. Of the 16 Directors who are currently on the Board, 8 Directors are nominees of the Society (‘Society Nominees’). The number of Society Nominees is expected to increase later this year when the Society nominates two persons to fill the vacancies which are reserved for it on the Board of Glanbia under the existing Relationship Agreement. While Siobhan Talbot is not a Society Nominee, she is a director of the Society.
If the Society’s Members approve the Proposed Transaction and Related Proposals, the existing Relationship Agreement between the Society and Glanbia will also be amended and restated pursuant to an Amended and Restated Relationship Agreement, with effect from such time as the Society’s shareholding in Glanbia falls below 33% (which will occur if the Society’s members approve the Proposed Transaction and Related Proposals), to provide that for 2022 and subsequent years the number of Directors on the Board of Glanbia who are also Society Nominees will reduce to 6. If the Society’s shareholding in Glanbia falls below 28%, discussions are to take place regarding a further reduction in the size of its representation on the Board of Glanbia.
The following governance arrangements will apply with respect to the composition of the Board of Glanbia if the Society’s shareholding in Glanbia falls below 33%:
· For 2017, the number of Directors on the Board of Glanbia, who are Society nominees will be 10;
· In 2018, the number of Society Nominees will reduce to 8, which number of Society Nominees will also apply in 2019;
· In 2020, the number of Society Nominees will reduce to 7, which number of Society Nominees will also apply in 2021; and
· In 2022 the number of Society Nominees will reduce to 6, which number of Society Nominees will also apply each subsequent year thereafter.
The Amended and Restated Relationship Agreement will continue to provide that it is the intention of the parties that the Society would continue to nominate a Society Nominee as Chairman of the Board until no later than 30 June 2020.
Up to 8 of the Directors on the Board will be made up of executives and independent (of the Society) non executive Directors. The parties will co-operate to ensure (as far as practicable) that the independent non executive Directors will be appointed on the recommendation of the Nominations and Governance Committee of the Board of Glanbia, the majority of whose members will be independent non-executive Directors. If the number of non-Society Nominees on the Board of Glanbia changes, the number of Society Nominees set out above will change pro rata.
Where a reduction is required to take effect in the number of Society Nominees in respect of a particular year it shall take effect on the earlier of the conclusion of the first board meeting of the Society immediately following the annual general meeting of the Society which takes place in that year or 30 June (or such earlier date as the Society shall agree with Glanbia) in that year.
Conditions to Completion
Completion of the Proposed Transaction is conditional upon:
· the approval of the Proposed Transaction by an ordinary resolution of the Independent Shareholders at the EGM;
· the approval by a simple majority of the members of the Society of its investment in Dairy Ireland (as contemplated by the Proposed Transaction) by means of an advisory resolution at a special general meeting of the Society being convened for 18 May 2017;
· the Placing by the Society having been completed and the proceeds thereof being available to the Society;
· there being no material adverse change to the business of Dairy Ireland between the date of the Share Subscription and Redemption Agreement and Completion; and
· GIID having arranged additional debt facilities in an aggregate amount not less than €100 million which are unconditionally available, including payment for the Dairy Ireland working capital. The Proposed Transaction cannot be completed without these additional debt facilities.
Completion of the Proposed Transaction is not conditional upon any regulatory approvals having been obtained.
Call Option in favour of the Society
Under the Shareholders’ Agreement, the Society will continue to have a call option (the ‘Call Option’) to acquire Glanbia’s 40% interest in GIID. This Call Option will be exercisable for a 1 year period commencing on completion of a change of control event in relation to Glanbia. For the avoidance of doubt, a reduction of the Society’s representation on the Glanbia Board or its shareholding in Glanbia below 30% shall not constitute a change of control for the purposes of the commencement of the Call Option (unless there is an associated acquisition by an unaffiliated third party of a controlling interest in Glanbia). The price payable by the Society on completion of the Call Option shall be an amount equal to 40% of the fair value of GIID as between a willing buyer and willing seller (and no discount in respect of Glanbia being a minority shareholder in GIID will apply). The fair value of GIID shall be agreed by Glanbia and the Society or, in the absence of agreement, the fair value shall be the midpoint between the valuations as determined for the fair value by two suitably qualified independent valuers. A cap of €950 million has been placed on the total consideration which may be payable in respect on the exercise of the Call Option by the Society. Without this cap, the Proposed Transaction would be categorised as a Class 1 transaction under the Listing Rules notwithstanding the fact that the Board believes it is highly unlikely that the fair value of GIID would increase to an amount that would cause the cap to be exceeded.
If following the exercise of the Call Option by the Society, GIID and/or GFIL continues to be a participating employer in the Dairy Ireland related defined benefit pension schemes and Glanbia continues to be the principal employer, the Society will guarantee to Glanbia the due performance of the obligations of these companies under the schemes for so long as each individual company remains as a participating employer.
For a period of 3 years from Completion, Glanbia shall not, directly or indirectly, without the Society’s prior written consent, transfer or dispose of any interest in GIID, or enter into any agreement, arrangement or understanding (whether legally binding or not) or do or omit to do any act as a result of which any third party may acquire such interest. This restriction shall not apply to transfers by Glanbia to subsidiaries of Glanbia provided that the transferee does not cease to be a subsidiary of Glanbia.
Extraordinary General Meeting
Glanbia expects to shortly publish a Circular on the Proposed Transaction which will be sent to shareholders. This Circular will contain a notice convening the EGM, with date, time and location, anda shareholder proxy voting form. The purpose of which will be for independent shareholders to consider, and if thought fit, to approve an ordinary resolution to approve the Proposed Transaction and give authority to the Directors to complete the Proposed Transaction. A further notification will be made by Glanbia upon the publication of the Circular.
Advisors to Glanbia PLC : Corporate finance advisor: IBI Corporate Finance, Sponsor: Davy Corporate Finance and legal advisor: Arthur Cox
Advisors to the Society: Corporate finance: EY and legal advisor: William Fry
Source: Glanbia plc