Could Kerry be ready to leave behind its cheese and ham roots?

Market Beat: Group linked with $25bn takeover of DuPont’s nutrition business

Kerry Group's chief executive of just two years, Edmond Scanlon, like any self-respecting son of a dairy farmer from the eponymous county, is giving little away.

Surrounded by mounting speculation that he's planning to double the size of the group through a merger with a business being sold by US speciality chemicals group DuPont de Nemours, the only thing Scanlon offered analysts on a conference call on Wednesday, as Kerry issued a trading update, was that the group's deals "pipeline remains robust".

Mergers and acquisitions (M&A) is “a really important part of our overall strategy and has been for a long time”, he added. “We generated a significant amount of shareholder value over the years through our M&A strategy.”

DuPont put its nutrition and biosciences division on the block in August with a mooted price tag of as much as $25 billion (€22.6 billion). Kerry, Dutch rival Royal DSM, Switzerland's Givaudan, the world's largest player in the global fragrance and flavours industry, and New York-based International Flavors & Fragrances, the second largest, were quickly identified as likely interested parties.


Two weeks ago, Dealreporter, a publication that specialises in covering M&A activity, reported that Kerry was in pole position to buy the DuPont unit, which the seller is looking to execute through a tax-efficient deal called a reverse merger trust.

This would involve DuPont handing its shareholders stock in the unit it is selling, which would then merge with another business, in this case, Kerry. As long as shareholders in the DuPont nutrition business own at least 50.1 per cent of the combined entity, the original spin-off of the DuPont unit is a tax-free transaction for the US group’s shareholders.

Kerry, having seen its market value soar by about a third so far this year to over €20 billion, fits the bill as it remains marginally below the price tag on Michigan-based DuPont’s nutrition unit. Shares across the wider European food and beverages industry have increased by an average of 20 per cent so far in 2019.

It's not the first time Kerry – whose phenomenal rise since its foundation by Denis Brosnan in 1972 in a rented caravan plonked in the middle of a muddy field in Listowel is the stuff Irish corporate folklore – bought a business bigger than itself.

Beyond dairy

Two years after floating in 1986, the group ventured beyond its original dairy products business into the food ingredients market by buying US-based Beatreme in a game-changing deal that propelled its international expansion. Kerry paid $130 million for the company, more than its own market value at the time.

But, since then, it has focused on small, bolt-on deals – including more than 200 deals in the past 25 years alone – to build a global nutrition business with almost €7 billion of revenues selling ingredients to beverage, confectionary, culinary food and pharma companies.

A tie-up with DuPont’s nutrition and biosciences business would almost double Kerry’s sales and push it deeper into probiotics, an area it has been targeting, as well as increasing its pharma customer base and exposure to the fast-growing market for meat substitutes.

However, the industrial biosciences part of the DuPont unit – which accounts for about a third of its $7 billion revenue – would be an odd business for Kerry to take on, with its focus on areas such as animal nutrition, detergents, biofuels and fertilisers. This may find itself being sold on after a tie-up.

A merger, too, would see Kerry's original consumer foods business, where brands include Dairygold, Denny and EasiSingles cheese slices, fall to a little more than a 10 per cent of the entire group's revenues.

Consumer foods

Many overseas investors have queried for some time why Kerry continues to hold on to consumer foods, where sales were running flat in the third quarter, while the taste and nutrition business enjoyed almost 4 per cent growth. The consumer foods division’s trading margins, at 7 per cent, are little more than half that of the dominant part of the group.

Analysts have put a value of about €1.5 billion on the unit. But Kerry executives have long defended the consumer foods business’s continued existence within the group, saying it’s a cash cow that fuels its M&A activity elsewhere and that the company’s taste and nutrition clients like that it has a consumer-facing business of its own.

In the background, of course, has always been the fact that Kerry Co-operative Creameries has an influential stake in the group and an obvious interest in the consumer foods business.

However, a stock-based merger between Kerry and the DuPont unit would dilute the co-op’s remaining 13.2 per cent significantly. It would also see more US-based investors come on board with no nostalgic affection for Kerry’s roots.