Kerry Group

It has been a peculiar week for the Kerry Group. There has been a storm of events surrounding the firm that have all reared their head recently. As the firm were midway through their presentation of their annual earnings release, a little-known firm, called Ontake Research, released a report declaring its short recommendation. But the more peculiar aspect of this story, is the accusations it made against Kerry Group’s acquisitions and its accounting practices around them. This is coupled with their ongoing issues with disputes over milk purchase prices against the backdrop of it amid selling off a stake in its milk processing business. A grand allegation, but is it without warrant?

Shares in the Kerry Group slid as much as 11.5% in one day on the back of this report. It accused the Kerry Group of trying to minimise its free cash flow figures. When calculating cash flow, capital acquisitions are seen as an outflow, thus reducing the final cash figures. They accused them of overpaying on their acquisitions, paying as much as 41x EBITDA (earnings) for a company, an astronomically high figure given the consumer foods business is normally viewed as a growth industry. Amongst the other accusations are the acquisition of a false front marketing company that has its headquarters put down as a scooter security shop. It accuses the Kerry Group of the misrepresentation of its accounts as well as overstating its profit margins on some of its investments. This is not the first company to criticise Kerry Group’s acquisition strategy. Shadow Fall Research Group, a UK short-selling research firm, has also highlighted possible accounting discrepancies in the past. Due to the Kerry Group acting as a conglomerate and an acquisition vehicle, its growth strategies will always be under increased scrutiny. Whether it is true or not remains to be seen. Goodbody and Barclays deemed the accusations to hold little weight. They said despite the high multiples of the acquisition prices, Kerry Group has continued to have its acquisitions perform well for the firm, adding value, whilst revenues across the firm have continued to increase year on year. Is this a case of smoke but no fire? Its stock price has yet to recover and there has been an increase in the short interest of the stock, so it is evident that the report has shaken the nerves of investors. Kerry Group has reported the firm to UK and Irish financial regulators, but it remains to be seen what will be done.

This is all comes on the back of the Wirecard scandal in the Summer gone. For years, accusations had been swirling around Wirecard and its fraudulent accounts. Similar to the situation Kerry Group is accused of creating, Wirecard inflated its revenues and balance sheet by faking businesses with third parties.  It is also accused of overpaying for acquisitions to inflate its Enterprise Value of the firm. Since the turn of the century, regulators have been implementing more penal sentences for financial crimes. They want to move away from the notion of protecting the elite. The ex-CEO of Wirecard was arrested on market manipulation and falsifying financial results. He faces up to 25 years in prison. Management are deemed to have a fiduciary duty to their shareholders and to falsify accountancy records is to defraud these investors. Jeffrey Skilling, former manager of Enron, was sentenced to 24 years in prison. Executives within Deutsche Bank and Volkswagen have also been sentenced to multi-year sentences. Whether for the Kerry Group this is all smoke and mirrors, or there is actually truth to the accusations, it can and would have criminal consequences for management staff.

With all this going on, the Kerry Co-Op is considering a joint venture with the Kerry Group in the dairy business worth €800 million. Kerry Co-Op is a group of shareholders within the Kerry Group. They hold a 12% stake within the Kerry Group. Kerry Co-Op will do their own due diligence, but the accusations mentioned above will make them more cautious to for their joint venture. This is against the ongoing issues with milk suppliers over purchase prices. There has been an ongoing dispute since 2015 over milk contracts and the agreed prices. Arbitration proceedings has been agreed with the Kerry Co-Op representing the milk suppliers, but as of yet, there has been resolution. An arbitration proceeding is an alternative form of dispute resolution, where the parties solve the dispute amongst themselves rather than going through the trial process. What makes the joint venture even more difficult, is that the Kerry Co-Op represents the milk suppliers. It has been made clear that any deal that is to be struck must be predicated on the remediation of the milk suppliers issue.

What will come of Kerry Group remains to be seen. It stands accused of very serious accusations. It must be noted that there are some inaccuracies and errors in the report, but it highlights a wider issue in the analysis of firms. From Enron to Wirecard, it has shown us that no firm is impervious to malpractice. It would have to be a very elaborate scheme to falsify the Group’s accountancy records and with it quite unlikely, but stranger things have happened. Whether it holds true or not, a cloud of smoke hangs over the head of the Kerry Group. They need to quash the rumours of their creative accounting whilst resolving the issues through arbitration for the milk suppliers. It remains an important issue if the Kerry Group is to go forward with their joint ventures. Whether the report is a foreshadowing of things to come is another question. But the Kerry Group faces an uphill task in resolving the problems that surrounds its firm currently.

Eoin Beecham