Glanbia to raise €119m in selling 75% of UK group

Glanbia is to raise €119 million by selling a 75 per cent stake in its underperforming UK cheese manufacturing operation to dairy co-operative Milk Link.

The deal will see Glanbia take a 25 per cent stake in a new joint venture with Milk Link - Cheese Company Holdings (CCH) - that will be the second-largest cheese producer in the UK.

Under the structure of the deal, CCH will pay €140 million to take over Glanbia's UK cheese subsidiary, Glanbia Foods.

Some €8.3 million of this will then be paid back by Glanbia to help get CCH up and running, with a further €13.1 million to be paid over the next four years.

The €119 million that remains from the total consideration will be used by Glanbia to fund expansion across other parts of its business that offer the potential for higher growth, such as nutrition and dairy ingredients.

Glanbia group managing director, Mr John Moloney, said yesterday that the UK cheese operation, despite being profitable, had not been generating sufficient return to merit the size of the investment.

He said the company would use the proceeds of the transaction to support organic and acquisition-led growth.

He expressed a particular desire to establish a firmer presence in south-east Asia, where Glanbia's ingredients are becoming increasingly popular.

Mr Moloney said avian flu-related concerns over chicken products in Japan could also create opportunities for Glanbia's pork products.

The company is already on track to expand its global reach by constructing one of the world's largest cheese and whey plants in New Mexico in the US. It is also scheduled to begin building a large-scale milk facility in Nigeria before the end of the year.

Glanbia Foods, the UK business being sold, logged a pre-tax profit of €3.1 million on turnover of some €302 million in the year ending on January 3rd.

Analysts said the net consideration of €119 million for the business represented a good price for Glanbia, which will be able to offset any loss in profits by using the proceeds to pay down debt and reduce interest costs.

They pointed out that the cheese business had reached a stage where Glanbia would have needed to allocate resources to upgrading its facilities if it was to remain competitive.

Glanbia will receive an initial €88 million payment in cash for the operation, with a further €52 million coming in an interest-bearing loan note beginning in 2008.

The sale will lead to the inclusion of a €49.1 million charge in full-year accounts due to be reported by Glanbia next week. Some €30 million of this related to the write-back of goodwill through the profit and loss account, with the remainder due to the write-down of assets and other costs.

"It's quite a good structure and we're pleased with that," said Mr Moloney, acknowledging that the deal was the fruit of lengthy negotiations.

He pointed out the company remained committed to the UK cheese business, with CCH expected to be "an important route to market" for Glanbia's Irish cheese production.

The board of CCH will be comprised of six representatives from Milk Link and two from Glanbia.

The new entity will operate four cheese-processing plants and a consumer-packing facility, with staff to number 1,000.

Glanbia's pizza cheese joint venture will not be included in the transaction, which requires approval from both the Competition Authority and the Milk Link member council.

Shares in Glanbia closed at €2.47 last night, down three cents.