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April 16, 2021updated 07 Jun 2021 2:42pm

Kerry Group’s dairy plans curdle – but probably only for now

A possible deal for Kerry Group's dairy assets has been put on ice but it's unlikely to be a complete souring of the Irish company's moves away from consumer foods.

Kerry Group’s much-discussed move away from consumer foods has hit a roadblock, with news the Irish company’s talks over the sale of its dairy assets have been halted.

The company, also a major international food-ingredients supplier and not shy about stating its desire to grow further in that area, had been in discussions to sell dairy sites in the UK and Ireland, as well as consumer-facing brands such as Dairygold spreads and Cheestrings.

However, Kerry Group announced yesterday afternoon (15 April) its negotiations with a potential buyer, Ireland’s Kerry Co-Operative Creameries, had been “suspended”.

The exact details of the talks had not been publicly revealed, although there had been reports the possible transaction would have seen the assets spun out into a venture and the co-op – also a shareholder in Kerry Group – buy a majority stake in the new entity and then would, some years down the road, buy the rest of the business.

However, there had also been reports of discord within the co-op’s board over how to fund and structure any deal. “We believe a fair valuation was put on the proposed transaction. The board of Kerry Co-Op will remain open to evaluating opportunities,” the co-operative said today in the wake of the talks being stopped.

Kerry Group has said it would continue to review its options and told shareholders it would issue an update on that process “later this year”.

So what happens next? It feels like the best opportunity for Kerry to strike a deal over those dairy assets is off the table, at least for now. Could a rival suitor come in? Reports in January suggested there was overseas interest; might Canada’s acquisitive dairy major, Saputo, which bought UK group Dairy Crest in 2019, be eyeing the situation?

Even if a deal is done on dairy, there is also some uncertainty over the fate of Kerry’s remaining consumer-facing businesses in meat products (and meat-free, with the Naked Glory brand) and in meals.

One company that had been touted as a theoretically interested party was Eight Fifty Food Group, the UK-Irish meat-and-seafood supplier that is itself set for new ownership.

The meat sector, however, is not short of processors looking to, as the jargon goes, "add value" to their operations by buying brands, while private equity could be another option.

The meals assets could be a trickier sale. Might another Ireland-based business with a presence in chilled ready meals, Greencore, look at boosting that side of its business through M&A?

Nevertheless, it still seems likely Kerry Group will – at some stage – become that pure-play food-ingredients player that many in the investment community believe the company should be.

A deal on dairy is the biggest piece of the puzzle and talks over that business are, after all, only "suspended", with Kerry's review continuing.

"Given the Brexit overhang has now lifted (a catalyst for this dairy review), the review itself continuing, discussions suspended and not terminated, and the remainder of the Consumer Foods division also arguably non-core, we feel confident this is not the end of this conversation," Jefferies analyst Ryan Tomkins wrote in a note to clients today.

It's likely we'll return to this one in the coming months.

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