Talk of Kerry Group dairy unit sale resurfaces as food giant battles US sales weakness

Kerry Group chief executive Edmond Scanlon has reason to view his failed attempt to double the size of the food giant in late 2019 – through a bid for the nutrition and biosciences business of the US chemicals group DuPont – as something of a lucky escape.

Shares in the ultimate acquirer, New York-based International Flavours & Fragrances (IFF), have plunged by almost 40 per cent ever since the $26.2 billion (€22.3 billion) deal was agreed. Concerns over its resulting debt pile amid heightened interest rates have forced the company in recent times to sell assets.

To make matters worse, Third Point, a hedge fund led by Dan Loeb, one of the most feared activist investors on Wall Street, appeared on the group’s shareholder register earlier this year – even if there are no signs yet that he has sent IFF one of his infamous “poison pen” letters attacking companies’ management teams.

The one thing neither Kerry Group – which has long left its dairy co-op roots behind to become a global taste and nutrition player – nor IIF have been able to avoid is being hit since late last year by food manufacturers scaling back orders for ingredients as they run down existing stock levels.

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With Kerry Group due to report interim results in less than three weeks’ time, Barclays analyst Alex Sloane reckons that the group’s taste and nutrition sales volumes in the Americas will dip by 1.5 per cent – driven by destocking across customers in the retail-focused sectors in the US.

There are also signs that the foot traffic in US quick service restaurants and cafes – a key part of Kerry’s food service business, which has held up until now – is beginning to weaken as consumers become more cautious about spending amid uncertainty about the economic outlook.

European sales remain solid, while those across the Asia Pacific Middle East and Africa are going gangbusters – expected to rise close to 7 per cent in the first half, according to Sloane – helped by China abandoning its zero-Covid policy and reopening its borders earlier this year.

But Jefferies analyst Charlie Bentley, for one, estimates that the group’s sales volumes will expand only by about 1 per cent this year. That’s a fraction of its 4-6 per cent average growth target over the medium term.

Shares in Kerry Group are down about 5 per cent on where they were changing hands 12 months ago.

Scanlon, the son of a dairy farmer who joined Kerry Group on a graduate programme in 1996, has focused since taking charge in October 2017 on slowly repositioning the business. He has overseen the sale of unwanted assets that accounted for a fifth the group’s €6.4 billion revenues at the time he took charge – and acquired businesses with a combined turnover €1.1 billion.

The recent deals focus has been on areas such as authentic taste, ranging from smoke and grill flavours on meats to flavours that make alcohol-free drinks palatable; food preservation technologies, to lower waste; health and bio-pharma ingredients; and plant-based meat alternatives. The group also has 1,100 research and development scientists on its payroll.

Asset disposals under the chief executive have included the sale two years ago of Kerry Group’s UK and Irish consumer foods’ meats and meals business – including brands such as Denny, Galtee and Richmond – to US poultry producer Pilgrim’s Pride for €819 million.

In March, it completed the sale of its sweet ingredients business, which serves the bakery, cereal, confectionery, dairy and ice cream industries, to a company owned by US equity firm Advent International for €500 million.

The more Scanlon has offloaded non-core or low-margin businesses, the more the group’s legacy Irish dairy processing business stands out as an anomaly – and a drag on the valuation analysts put on the entire company.

The Dairy Ireland unit, with processing plants in Listowel, Charleville and Newmarket and brands such as Dairygold spreads, Charleville cheese and Cheestrings snacks, is estimated to account for less than 6 per cent of group earnings before interest, tax, depreciation and amortisation (ebitda) this year.

Previous talks on Kerry Group selling a 60 per cent stake in the dairy business to its Kerry Co-op, the group’s main shareholder, with about an 11.4 per cent stake, broke down two years ago amid a standoff over price. Kerry Group had been looking for a deal that placed a €800 million valuation on a joint venture.

The board of the co-op drafted in a veteran of the industry – former Dairygold boss Jim Woulfe – early this year to advise on a strategic review, which is widely expected to amount to a fresh approach.

The board may be pushing an open door with Kerry Group. Getting the co-op shareholders on the same page is an entirely different matter. Most of its 12,000 shareholders are what are known as “dry” shareholders, farmers or their families who have long exited the milk business and do not have a strategic interest in the dairy processing company. They don’t have a vote at co-op meetings.

However, industry sources say there is also widespread disagreement, for various reasons, among those who can vote – active milk suppliers and those that had recently left the business – about whether taking control of Dairy Ireland, funded by a further sell-down of co-op shares in Kerry Group, is a wise move.

An overwhelming majority of those that voted at the co-op annual general meeting last week backed a proposal to prohibit the board from making any more than €50 million of investments in a five-year period without authorisation from shareholders.

A group of shareholders wants to go further and effectively ringfence most of the shares the co-op has in the publicly-listed group – limiting its ability to use a stock sale to finance a potential deal. Woulfe could find yet himself facing a few bumps on those Kerry roads.