Kerry's Cash Crop

THIS week's gathering of shareholders in Tralee might have officially been the annual general meeting of the publicly quoted Kerry Group, but, for all intents and purposes, it turned into an AGM of Kerry Co-op. Most of the 200-plus in attendance had one thing on their minds - the proposal that the coop transfer a quarter of its holding in the plc directly into co-op shareholders hands - a move that will see 6,000 co-op shareholders receive plc shares worth over £130 million.

This change to Kerry's corporate structure represents a fundamental change but judging by the positive mood as Monay's AGM, the rule changes will receive the required 75 per cent approval at two special co-op general meetings in the months ahead.

In an interview with The Irish Times following the AGM, Kerry Group managing director Denis Brosnan was not taking a "yes" vote for granted and conceded that there are some among the co-op's 6,000 shareholders who oppose the proposal to give up control of the plc, despite the financial windfall that the conversion will bring.

"There are some who are opposed, we know that, but the straw polls from our meetings with the advisory committees indicate 90 per cent approval for the rule changes."

Mr Brosnan warned, however, that the vote will be decided by those who actually turn up at the special meetings and, under co-op rules, only those present can vote on even this most fundamental change to the structure of the business. This is seen as a strong hint to co-op shareholders that if they want to see the rule changes implemented, then they had better make sure they turn up and vote.

Mr Brosnan himself will have a crucial impact on the voting. In the past, Kerry Co-op's 6,000 shareholders have put their trust in the chief executive and his management team as various major changes took place. First the co-op shareholders agreed to Kerry going public 10 years ago and since then they have enthusiastically supported a number of rights issues which have funded Kerry's extraordinary expansion in the past 10 years.

"Control of the plc is not the emotive issue it was before." Certainly, this week's AGM was pretty devoid of emotion, although a few shareholders did show some concern about the loss of control and particularly the impact that could have on the locally-based agribusiness operation. Mr Brosnan went out of his way to provide reassurance.

"We've spent almost 24 months trying to get the balance right for all co-op shareholders - existing milk suppliers, future milk suppliers and `dry' shareholders. We are conscious of the needs of each category. We've always said that it's more important to have the organisation functioning well than spend time worrying who has 50, 40 or 30 per cent.

"The coop will still have more than adequate control with less than 50 per cent of the shares, we think this is a good compromise and a good solution for all parties."

One crucial element will come next week when the Kerry board meets to decide on whether the co-op should be given an option to acquire the local agribusiness division - a move that should reassure co-op shareholders that this business will remain in local control even if the co-op stake in the plc falls towards the new floor of 20 per cent.

"My view is that it is probably worthwhile to give the co-op this option to buy the agribusiness operations," says Mr Brosnan who adds that agribusiness - which is made up of a feed mill, creameries, an AI station and a fleet of trucks, but not the Listowel milk plant - has sales of around £57 million and a current value of £15-20 million.

Were the co-op to exercise this acquisition option at any stage, it could easily fund this through sales of some of its plc shares. Even with a reduced stake of 39 per cent, the co-op's stake in the plc is worth around £400 million and sale of shares would find ready buyers in a market that has always been starved of Kerry stock.

If and when the co-op rules are changed and 6,000 co-op shareholders become owners of over £130 million worth of Kerry stock - an average of £22,000 each - there is unlikely to be any flood of shares on to the market.

Kerry finance director, Hugh Friel, says that a few per cent of the 13 per cent of the plc shares being transferred might eventually find their way on to the market. "People tend to forget that the co-op shareholders have been very supportive of share issues in the past. As well as owning 52 per cent of the plc through the co-op, the coop shareholders individually own a further 6 per cent of Kerry shares and have rarely been sellers.

In any event, capital gains tax of 40 per cent is likely to mean that taxation of their windfall will prevent any significant selling of the shares being transferred from the coop to the co-op members.

Institutions currently hold about 38 per cent of Kerry shares, but virtually every Irish investor is heavily underweight and will be in the market for any stock that comes on offer.

The Irish institutions may, however, have to compete against a growing number of overseas investors who have bought into Kerry shares in the past couple of years. One Canadian institution, Trimark, has emerged as a 3.1 per cent shareholder - and given Kerry's presence in the MSCI Index - more overseas institutions, which track that index, will be looking to buy.

Liquidity in Kerry shares should improve after the transfer of the co-op shares, but not to a huge degree and it will still be difficult to buy in size. That continued shortage should support Kerry's premium price in the market.