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Udder truth

16 February 2021 By Dasha Afanasieva

Bears are trying to make mincemeat of Irish food group Kerry. Ontake Research joined a sleuth of short-sellers last week when it accused the dairy and ingredients group of overstating the value of some of its acquisitions. The 19 billion euro maker of Dairygold butter and Richmond sausages casually dismissed the criticism and is powering ahead with its shopping. Tackling the claims head-on would better vindicate its strategy and bolster its valuation.

Kerry, which started life processing milk in 1972, now makes the bulk of its revenue from flavourings and ingredients. It has used small acquisitions, including of early-stage ventures, to grow sales and pivot away from simple sausages and milk.

That’s the strategy that Ontake, and another company critic Shadowfall, have challenged. Ontake singled out eight acquisitions worth up to 1 billion euros that were worth “nowhere near that”. Ontake also questioned the impartiality of Chief Financial Officer Marguerite Larkin when she was signing off accounts as Kerry’s auditor prior to joining the company in 2018.

For its part, Tralee-based Kerry said Ontake’s report was riddled with errors and incorrect deductions – an accusation Larkin has also lodged with regulators. Nonetheless, with Kerry’s integrity now publicly questioned by some investors, it should provide a point-by-point rebuttal – something it has so far failed to do. Rather, it has ploughed on with its deal-heavy strategy: on Monday it said it would acquire Spanish probiotics company Biosearch Life for 127 million euros.

Kerry’s minimalist defence has only partially worked. The stock closed 5% lower on the report and it’s down more than 7% this year. The valuation gap with Swiss flavourings group Givaudan has widened: its shares trade at 37 times 2021 earnings – a one-third premium to Kerry’s.

Part of the discount stems from Kerry’s less-profitable consumer business. Chief Executive Edmond Scanlon said he’s considering selling the UK and Ireland dairy business, which has around 900 million euros in revenue. That would increase margins overall and help Kerry trade closer to its Swiss rival.

But with lingering accounting credibility questions outstanding, it will take more than a disposal or two to catch up to the 33 billion Swiss franc group. Scanlon needs to embrace greater transparency to demonstrate that the short-seller narrative is cock and bull. Until then, Kerry’s valuation will lack full flavour.


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