Earlier this week, Current Account bumped into an equity analyst friend who was a matter of hours off his return flight from the Algarve. "Anything interesting happen last week?" asked the analyst. "Oh yeah, Kerry bid for Golden Vale," responded Current Account.
There was a look of disbelief on the analyst's face. "You're joking aren't you?" When the response was in the negative, the analyst said: "What are they doing that for, hasn't Denis Brosnan said umpteen times in the past that he doesn't want to buy any more Irish milk business?"
That little conversation sums up the reaction of some in the market to Kerry's opportunistic move to target Golden Vale when it was at its most vulnerable, with farmers in open rebellion about milk prices. Takeover rules have prevented Kerry giving a detailed explanation for its decision to increase its lowerrated consumer foods business instead of bolstering its already very strong position in the more highly-rated food ingredients business.
Kerry's shares have slipped back from #13.70 to #13.00 since it made its approach to Golden Vale public, and that presents some problems for the men in Tralee. If the share price stays weak, then it will mean having to issue more Kerry paper to Golden Vale shareholders and even that presupposes that a deal on price can be done with Golden Vale.
Kerry's own shareholders will want some reassurances that their equity is not being diluted unduly to allow for a paper bid for Golden Vale, while the weakness in Kerry shares has given Jim Murphy more ammunition for his argument that the one-for-10 offer undervalues Golden Vale.
Certainly there is some justification that Kerry's #297million (current value) bid for Golden Vale is on the light side. Golden Vale has had its problems in recent years, not least in the milk side of its business. But it has invested heavily in its consumer foods business with almost #100 million spent on developing ultra-modern facilities in Coleraine for burger-cheese slices, Carrickmacross and Enniskillen (frozen meals) and Charleville (cheese). Is that #100-million investment reflected in a #207-million offer, not to mention the value of brands like Cheesestrings? Hardly.
Denis Brosnan and Hugh Friel are walking something of a tightrope at the moment. On the one hand, the bid for Golden Vale could be interpreted as reducing its emphasis on the more highly-rated ingredients business and that could affect Kerry's own premium rating in the market. On the other, Kerry could legitimately claim that a third of its current business is consumer foods and that combining this with Golden Vale's own consumer foods business makes eminent sense.
At the end of the day, it will come to price and it is hard to see Kerry getting a recommended offer for less than #1.60 and that would mean a one-for-8.5 share swap instead of the mooted one-for-10 and issuing 20 million shares to Golden Vale shareholders instead of the mooted 17.2 million.
Kerry has prided itself for not overpaying for acquisitions and its supporters in the market will expect Messrs Brosnan and Friel to walk away from Golden Vale rather than pay over the odds. Anything significantly more than 10 times earnings, or #1.60 per share, for Golden Vale would be difficult to justify.
Jim Murphy has tried to up the ante by refusing to meet Denis Brosnan until he increases the proposed offer price. But the Golden Vale boss is no doubt acutely aware that if Kerry does walk away, and no other offer emerges, then Golden Vale shares are likely to fall heavily.