REG - Kerry Group PLC - Proposed Sale of Kerry Dairy Ireland

KerryAnnouncement

12/11/2024 07:00

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RNS Number : 7946L  Kerry Group PLC  12 November 2024

12 November 2024

 

LEI: 635400TLVVBNXLFHWC59

This announcement contains inside information

 

KERRY GROUP PLC

PROPOSED SALE OF KERRY DAIRY IRELAND TO KERRY CO-OPERATIVE CREAMERIES LIMITED

Kerry Group to Become a Pure Play Taste and Nutrition Company

Kerry Group plc ("Kerry Group" or "Kerry") today announces that it has entered
into an agreement with Kerry Co-Operative Creameries Limited (the "Co-Op") to
sell Kerry Dairy Holdings (Ireland) Limited ("Kerry Dairy Ireland") to the
Co-Op (the "Disposal") for a total expected consideration of €500 million 1 
(#_ftn1) . Kerry Dairy Ireland is fully owned by Kerry.

Kerry Dairy Ireland consists of Dairy Consumer Products, with its leading
range of well-loved brands across cheese, cheese snacks, dairy snacks and
dairy spreads which can be found in chilled cabinets across retailers in the
UK and Ireland. It also comprises the Dairy Ingredients business, which is a
leading provider of Irish dairy ingredients including functional dairy
proteins, nutritional dairy bases and cheese systems, along with the provision
of related agribusiness products and services.

Pursuant to the Share Exchange Steps (as described below), the Co-Op members
will become direct owners of Kerry shares equivalent to 85% of the Co-Op's
current shareholding. The remaining 15% of the Co-Op's shareholding in Kerry
will be redeemed as part of the consideration for the Disposal, following
which the Co-Op will cease to be a shareholder in Kerry and Kerry's issued
share capital will reduce by approximately 2.9 million shares. The transaction
will involve no public placement of Kerry Group plc shares.

The Disposal and the Share Exchange Steps are referred to in this announcement
as the "Proposed Transaction".

Under the Proposed Transaction, the Co-Op will initially acquire a 70% 2 
(#_ftn2) interest in Kerry Dairy Ireland (the "Phase 1 Transaction"), while
Kerry will retain a 30% interest. The parties have further agreed to certain
call-put option arrangements which will transfer the remaining 30% in Kerry
Dairy Ireland to the Co-Op in the forthcoming years (the "Phase 2
Transaction").

Highlights of the Proposed Transaction

>    Will result in two leading businesses, Kerry Group and Kerry Dairy
Ireland, each better positioned to focus on their respective strategies and
capital allocation priorities:

-  Kerry Group: A leading global provider of taste and nutrition solutions
for the food, beverage and pharmaceutical markets.

-  Kerry Dairy Ireland: A leading Irish provider of dairy consumer products
and dairy ingredients.

>    For the fiscal year 2023, Kerry Dairy Ireland generated revenue of
€1,283.4 million (FY2022: €1,538.9 million) and an EBITDA of €53.4
million (FY2022: €70.7 million). The profit before tax attributable to the
assets of Kerry Dairy Ireland at the end of December 2023 was €32 million.
The attributable net assets of Kerry Dairy Ireland at the end of December 2023
were €446 million, with gross assets of €562 million inclusive of
attributable goodwill and intangibles of €152 million.

>    The Proposed Transaction values Kerry Dairy Ireland at an
enterprise value of €500 million(1), equivalent to a multiple of 9.4x EBITDA
for the fiscal year ended 31 December 2023 (FY2022: 7.1x EBITDA).

>    The consideration for the Phase 1 Transaction will be an estimated
€350 million(1) and will be satisfied by the following means:

-  Consideration in the form of Kerry shares by way of a redemption by Kerry
of a portion of the Co-Op's shareholding in Kerry, to occur in connection with
the Share Exchange Steps, in an estimated amount of €251 million and
equivalent to approximately 2.9 million Kerry shares 3  (#_ftn3) ;

-  A cash payment in an estimated amount of €56 million funded by way of
third party acquisition debt; and

-  A loan agreement to be entered into between Kerry and the Co-Op in an
estimated amount of €43 million 4  (#_ftn4) .

>    Kerry will be entitled to a fixed dividend of €7.5 million per
annum during the period of the joint ownership.

>    The cash proceeds of the Proposed Transaction will be used by Kerry
for general corporate purposes.

>    The Phase 1 Transaction is expected to complete by the end of
January 2025. From the date of completion of the Phase 1 Transaction, Kerry
will no longer consolidate Kerry Dairy Ireland in its Group financial
statements and will record its 30% interest as an investment.

>    The Proposed Transaction will have a positive impact on Kerry's
overall financial metrics with an enhanced revenue volume growth profile of
c.+30 bps p.a., a step change in its EBITDA margin profile of c. +140 bps,
while also improving its overall sustainability profile.

>    Given the transaction structure, the Proposed Transaction will
result in a minimal dilution to Kerry's adjusted earnings per share of c. 2%
in the first year post transaction.

>    The Proposed Transaction includes seven manufacturing facilities
and over 1,500 employees.

As the Co-Op holds approximately 11% of the issued share capital of Kerry, the
Co-Op is considered to be a substantial shareholder of Kerry for the purpose
of the Irish Listing Rules. The Proposed Transaction therefore constitutes a
related party transaction for Kerry and is subject to the approval by Kerry's
independent shareholders 5  (#_ftn5) . The Proposed Transaction is also
subject to approval by the Co-Op's members and other customary conditions
including certain regulatory approvals.

Kerry to Become a Pure Play Taste and Nutrition Company

The Proposed Transaction represents an important step in Kerry's evolution to
becoming a fully dedicated global taste and nutrition solutions company. This
follows the significant portfolio development over recent years including the
build out of its proactive health, food protection and preservation, and
enzymes platforms, while also divesting of the Consumer Foods Meats &
Meals business and the Sweet Ingredients portfolio. The Proposed Transaction
will result in greater portfolio clarity, a more simplified business
structure, and increased capital deployment focus across Kerry's core taste
and nutrition business, while further strengthening Kerry's ability to execute
against its strategic priorities.

The Proposed Transaction will have a positive impact on Kerry's overall
financial metrics, with an enhanced revenue volume growth profile, combined
with a step change in Kerry's EBITDA margin profile and an improved overall
sustainability profile.

Paving the Way for Kerry Dairy Ireland's Long-term Success

The Proposed Transaction builds on the successful partnership between Kerry
and the Co-Op, which first began in 1974 and will evolve to a new ownership
model for Kerry Dairy Ireland. The structure of the Proposed Transaction with
Kerry continuing to have 30% ownership into the future will support continuity
and alignment with Kerry Dairy Ireland, the Co-Op's members and other
stakeholders.

The Proposed Transaction also brings consumer products and value-add dairy
ingredient activities closer to the dairy farmers and broader dairy ecosystem,
thereby creating a vertically integrated Irish Dairy player of scale, which
will be one of the largest dairy processors in the country. In order to ensure
continuity in Kerry Dairy Ireland's operations and facilitate an orderly
ownership transition, Kerry, the Co-Op and Kerry Dairy Ireland have agreed
that certain transitional services will be provided by Kerry to Kerry Dairy
Ireland comprising IT services, group shared services, purchasing services and
corporate services. Certain IP licencing arrangements will also be entered
into such that the Kerry Dairy Ireland Business can continue to avail of
certain IP it requires which is owned by Kerry.

As part of the Proposed Transaction, Kerry and the Co-Op will enter into a
Shareholders' Agreement for the period during which Kerry remains a
shareholder in Kerry Dairy Ireland with terms and conditions that are
customary to transactions of this nature. The board of Kerry Dairy Ireland
will consist of up to 13 directors comprised of seven Co-Op directors, three
individuals nominated by Kerry, two independent directors, who the Co-Op and
Kerry may agree to appoint to the board from time to time, and the Chief
Executive Officer ("CEO") of Kerry Dairy Ireland. Kerry Dairy Ireland will
continue to be led by Pat Murphy as CEO (who Kerry Dairy Ireland has
identified as a key individual important to the business) with support from
Kerry Dairy Ireland's existing, strong team of executives and employees.

Edmond Scanlon, Chief Executive Officer of Kerry Group, commented:

"The proposed transaction represents a significant step in Kerry's 50 year
journey. Our strategy of continuous business development and portfolio
evolution aligned to our customers has been a key underpin of Kerry's success
over the years. The proposed transaction will result in a global leader in
taste & nutrition solutions and an end-to-end industry leader in dairy.
Both businesses are perfectly positioned for success, thanks to the dedication
and extraordinary contribution of our people over the years.

On completion, Kerry will become a pure play global business to business taste
& nutrition company, with sustainable nutrition at its core, while also
supporting our financial objectives of continued market outperformance, strong
margin progression, and delivering greater returns for our shareholders."

James Tangney, Chairman of Kerry Co-Op commented:

"We are very pleased to have reached an agreement that will ultimately deliver
full ownership of one of the leading dairy businesses in the country, while
also, in effect, releasing c.85% of Kerry Co-Op's Kerry Group shares into the
hands of our members to be retained or sold by each of them at a time of their
choosing.

 Kerry Co-Op and Kerry Group have a shared heritage that has helped create
value, pioneer change and shape the dairy industry.

As direct shareholders in the plc, members will continue to gain from the
Group's progress and, in tandem, the Co-Op will focus on ensuring Kerry Dairy
Ireland becomes a platform for future growth".

Additional Detail on the Terms of the Proposed Transaction

>    Phase 1 Transaction: The consideration for the Phase 1 Transaction
will be an estimated €350 million, subject to the following adjustments:

-  Customary completion accounts adjustments in respect of cash, debt and
working capital;

-  A potential valuation adjustment should Kerry Dairy Ireland not achieve
agreed adjusted EBITDA targets through to fiscal year end 2025 6  (#_ftn6) .
To the extent any such adjustment should arise, Kerry does not expect it to be
material to the Group; and

-  A potential adjustment in the unlikely event that there is a material
adverse movement in the value realised by the Co-Op as a result of the Share
Exchange Steps described below.

>    Share Exchange Steps: The Co-Op currently holds approximately 19
million Kerry shares equivalent to approximately 11% of the issued share
capital of Kerry. The following steps (the "Share Exchange Steps") will occur
on completion of Phase 1 of the Proposed Transaction:

-  Share for Share exchange: A share for share exchange whereby Kerry will
acquire approximately 85% of the shares in the Co-Op that are held by its
members, in exchange for issuing an amount of Kerry shares directly to the
members of the Co-Op, equal in value to approximately 85% of the Kerry shares
currently held by the Co-Op;

-  Redemptions: (a) The redemption by Kerry of the Co-Op's entire
shareholding in Kerry (approximately 19 million shares), in exchange for a
promissory note of equivalent value, and (b) the redemption by the Co-Op of
the Co-Op shares held by Kerry (as acquired in the share for share exchange
above) in exchange for a promissory note of equivalent value;

-  Promissory note set off: The amounts outstanding under each promissory
note will be offset against each other, which will result in a promissory note
balance in favour of the Co-Op equal to approximately 15% of the market value
of the Co-Op's original 11% shareholding in Kerry Group and which will be used
by the Co-Op to fund part of the Phase 1 Transaction Consideration.

As a result of the Share Exchange Steps, (i) Kerry's issued share capital will
reduce by approximately 2.9 million shares, (ii) the Co-Op will no longer hold
shares in Kerry, and (iii) the Co-Op members will directly hold Kerry shares.

>    Phase 2 Transaction: At any time on or prior to 31 July 2035, the
Co-Op will have the right to purchase the remaining 30% interest in Kerry
Dairy Ireland in exchange for cash in an amount of €150 million(1), with
closing to occur no later than 31 December 2035 (the "Call Option"). In the
event that the Co-Op does not exercise the Call Option before 31 July 2030,
Kerry will have the right at any time after 31 July 2030 and on or prior to 31
July 2035, to require the Co-Op to purchase the entire 30% interest in Kerry
Dairy Ireland for a consideration of €150 million(1) (to be satisfied by way
of cash and/or seller loan agreement) with closing to occur by no later than
31 December 2035 (the "Put Option"). On exercise of the Put Option or the Call
Option, Kerry Dairy Ireland will become wholly owned by the Co-Op.

Milk Supply Agreement

With effect from completion of the Phase 1 Transaction, Kerry, Kerry
Creameries Limited (a subsidiary of Kerry Dairy Holdings (Ireland) Limited)
and the Co-Op have agreed that a fund of €50 million be established and
funded by Kerry within Kerry Creameries Limited for the resolution of the
ongoing dispute and related claims and arbitrations between Kerry Creameries
Limited and certain milk suppliers in relation to the milk price paid and
payable by Kerry Creameries Limited to certain milk suppliers pursuant to the
Milk Supply Agreement which remains in place until 2026. Once the fund has
been established the parties have agreed that Kerry will have no liability for
any existing or future claims from Milk Suppliers under the Milk Supply
Agreement. Separate communications with further detail in this regard will be
issued by both the Co-Op and Kerry Creameries Limited to such milk suppliers.

Next Steps and Timing

An extraordinary general meeting of Kerry is expected to take place on
Thursday 19 December 2024 for Kerry shareholders to vote on the Proposed
Transaction. A notice of the extraordinary general meeting and shareholder
circular with further details on the Proposed Transaction and proposed
shareholder resolutions is expected to be published on or around Monday 25
November 2024.

About Kerry Group

Kerry Group is a world leading provider of taste and nutrition solutions for
the food, beverage and pharmaceutical markets. It innovates with its customers
to create great tasting products, with improved nutrition and functionality,
while ensuring a better impact for the planet. Kerry's leading consumer
insights, global RD&A team of 1,200+ food scientists and local
manufacturing footprint in 34 countries enables it to co-create with its
customers across over 150 countries. Kerry is driven to be its customers most
valued partner, creating a world of sustainable nutrition. For more
information, visit www.kerry.com (https://www.kerry.com/) .

About Kerry Dairy Ireland

Kerry Dairy Ireland is a leading provider of dairy consumer products and dairy
ingredients. The Dairy Consumer Product portfolio comprises cheese, cheese
snacks, dairy snacks, dairy spreads and low-fat spreads as well as dairy
alternative and hybrid ranges. The dairy consumer brands include brands such
as Cheestrings, Dairygold, Golden Cow, Kerrymaid, Low Low amongst others,
which can be found in chilled cabinets, principally in retailers across
Ireland and the UK. The Dairy Ingredients products portfolio includes
functional dairy proteins, nutritional dairy bases and cheese systems, along
with the provision of agribusiness products and services in the southwest of
Ireland.

Inside Information

This announcement contains inside information. The person responsible for
arranging for the release of this announcement on behalf of Kerry Group plc is
Ronan Deasy, Company Secretary. The time and date of this announcement is, at
6.30am Irish time, 12 November 2024.

Analyst and Investor Call

A presentation to analysts and investors will be broadcast live from 7.30am
Irish time on the Investors section of Kerry Group plc's website
(www.kerry.com/investors (http://www.kerry.com/investors) ).

Related slides will also be available on the website in the Investors section.

Advisers

Advisers to Kerry:  Financial adviser: Goldman Sachs International, Sponsor:
J & E Davy and Legal adviser: Arthur Cox LLP.

Advisers to the Co-Op: Financial adviser: EY and Legal adviser: McCann
FitzGerald LLP.

 

     CONTACT INFORMATION

     Investor Relations
     Marguerite Larkin, Chief Financial Officer
     +353 66 7182292 | investorrelations@kerry.ie
     (mailto:investorrelations@kerry.ie)

     William Lynch, Head of Investor Relations
     +353 66 7182292 | investorrelations@kerry.ie
     (mailto:investorrelations@kerry.ie)

     Media
     Catherine Keogh, Chief Corporate Affairs Officer
     +353 45 930585 | corpaffairs@kerry.com (mailto:corpaffairs@kerry.com)

     Website
     www.kerry.com (http://www.kerry.com)

 

 1  (#_ftnref1) Subject to certain adjustment mechanisms described below.

 2  (#_ftnref2) Subject to potential adjustment according to agreed mechanisms
applicable in certain scenarios.

 3  (#_ftnref3) Amount based on Kerry share price of €87.90 as of market
close on 8 November 2024. Effective amount to be calculated based on the
volume-weighted average price (measured over ten business days prior to
completion of the Phase 1 Transaction).

 4  (#_ftnref4) The loan agreement will be on arm's length terms.

 5  (#_ftnref5) Independent shareholders are Kerry's shareholders other than
the Co-Op and persons who are associates of the Co-Op for the purposes of the
Irish Listing Rules.

 6  (#_ftnref6) 70% of the potential adjustment amount will apply to the Phase
1 Transaction and 30% will apply to the Phase 2 Transaction.

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