23/04/13

Dairy Crest has taken the unusual step of providing part of the funding needed for its pension fund in the form of its inventory of maturing cheese, which has a value estimated at around £150 million. The company has, in effect, given the pension scheme rights to £60 million of the inventory – such that, in the event of Dairy Crest’s insolvency, the pension fund could realise the market value of the cheese.

Such a move is not, however, unprecedented. In 2010, in an attempt to at least partially plug a £1 billion hole in its pension scheme, Diageo signed over up to 2.5 million barrels of maturing Scotch whisky as collateral.

Dairy Crest has been struggling with its pension fund for some time, in common with many other UK companies – something which has seen most withdraw from, or modify the terms of, so-called ‘final salary’ schemes

The Dairy Crest move – which sees it also contributing £40 million in cash to its pension scheme - is part of a capital restructuring being undertaken by the company. £100 million of loan notes are to be repaid early, and its revolving credit facility has been reduced by £51 million to £247 million.

The company said that the moves would see it with a more appropriate capital structure with lower interest charges of approximately £7 million in the year ending 31 March 2014, leading to an improved dividend cover.

In August 2012 Dairy Crest sold its French spreads business St Hubert for £341 million in cash and recorded a pre-tax profit of £51.4 million on the transaction. Since that time Dairy Crest has been holding substantial amounts of cash on short term deposit in order to retain flexibility while the Board evaluated the full range of options for the use of proceeds from the sale. However these deposits have been delivering very low returns and the Board has now decided that shareholders' interests are best served by the implementation of a more appropriate capital structure.

"Following the successful sale of St Hubert, we have now restructured our balance sheet, putting in place a more appropriate capital structure,” said Mark Allen, chief executive of Dairy Crest. “This will reduce interest costs going forward and underpin the dividend and still gives us scope to invest to grow the business. We are also pleased to have reached agreement with the Trustee of the Pension Fund to improve its financial position at an acceptable cash cost to the company."