Kerry Group should be able to more than halve its debt from £670 million now to £300 million within the next five years, Riada Stockbrokers has stated in an analysis of the £394 million acquisition by the group of Dalgety Food Ingredients.
This debt paydown excludes the proceeds of any asset disposals or any fund-raising in the market - Kerry has already indicated that it intends to hold on to all of the Dalgety operations and has no plans to raise funds through a share placing or rights issue.
Judging by the tone of the research note, Riada analyst, Mr Joe Gill, is not totally convinced that this will necessarily be the case, and he has put a £90 million sterling value on Dalgety's Spillers Milling operation, the one part of Dalgety which may not represent a strategic interest for the Irish group.
Dalgety will contribute for nine months of Kerry's 1998 financial year and Riada believes that the deal will boost pre-goodwill profits to £92.1 million in year one and boost operating profits in year one by £25 million.
The £6 million goodwill written off in year one will result in postgoodwill profits of £86.1 million. In 1999, when there will be a full goodwill charge of £8 million, Riada expects post-goodwill profits of £97.5 million. At the earnings level, the broker expects postgoodwill earnings per share this year of 42p followed by 46.4p in 1999.
"Technically, a debt-funded deal is plausible, with interest cover in year one of three times, and annualised net cash flows of £90 million plus capable of reducing the £670 million pro forma borrowings. However, equity funding or asset disposals would give the group some comfort and resource it for other in-full deals, such as those completed in Malaysia and Britain in the past two months. We reckon the flour milling assets are worth in excess of £90 million sterling," the Riada report adds.
Significantly, the Riada analyst has also raised the possibility "in theory" of Kerry disposing of its consumer foods business. "As its ingredients businesses grew, they are increasingly supplying products to food manufacturers with whom they also compete in consumer foods. This could become a significant issue as the company evolves.
"In theory, the consumer foods division (or parts thereof) could be disposed, releasing assets for the ingredients division and providing greater focus on the value of the group's position in the global food industry."
