Deal would yield savings for Kerry

Kerry Group could expect savings of some 6p-7p a gallon in efficiencies in milk processing, and probably also in milk assembly, without major surgery, if it succeeded in buying Golden Vale.

Farmers in Golden Vale, who have been conducting a long protest against poor prices for their milk, could expect to get as much as 4p a gallon more, although Kerry is currently paying just 1p extra.

While Kerry's proposed offer is set at €1.37 (£1.08) a share, industry sources believe the first formal offer to shareholders could be of the order of €1.57E1.60. This would net a tidy profit for those farmers who held on to their shares in the company. Farmer shareholders hold 15 per cent of the shares, while businessman Mr Dermot Desmond holds 12.5 per cent.

Golden Vale shares, like those of other dairy processors, have been undervalued. Analysts say a takeover is one way of correcting this undervaluation; another would be a management buyout. Analysts like DKM have always maintained that milk is a good business.

Kerry has not tried to increase intake of raw milk to its dairy plant in Listowel in recent years. However, the acquisition of Golden Vale - with its slightly larger milk pool - would give Kerry a pool of 240 million gallons.

What Mr Denis Brosnan plans to do with the extra milk is another matter. He may not use it as Golden Vale has done. There is speculation that he might use it for milk proteins, casein and caseinates.

For many years, both companies have been moving away from milk and their portfolio of products in food ingredients and consumer foods dovetail in many areas.

The Minister for Agriculture, Food and Rural Development, Mr Walsh, believes the proposal is a "welcome development" provided farmers, workers and shareholders can reach agreement. "It will lead to rationalisation and efficiencies. We know Kerry has a proven track record and is a world leader in a number of areas. I think it can extend that culture and efficiency to Golden Vale and have the economies of scale as well."

He said this kind of streamlining had been proposed by his working group looking at the industry to 2010. "I have committed myself to studying it and seeing how best it can be accelerated. Expansion in Europe and the next World Trade Organisation round will both bring further pressure for efficiency," he said.

Mr Padraig Walshe of the Irish Farmers' Association has described the Kerry bid as "a major shake-up in the industry" and Mr Pat O'Rourke, president of the Irish Creamery Milk Suppliers' Association, has urged the board of Golden Vale to enter into serious discussions immediately with Kerry Group.