18 April 1997

Merger on cards as Avonmore co-op approaches Waterford

By Philip Clarke

TWO of Irelands biggest dairy co-ops – both with significant interests in the UK – are poised for a possible merger.

Avonmore, with total milk busin-ess of 2.27bn litres (including 680m litres in the UK), has made a formal proposal for Waterford Foods, owner of The Cheese Company and the fourth biggest operator in the UK, with about 1bn litres.

Waterford has been in financial difficulty, due to adverse market conditions. Last month it issued a profits warning, and has now produced preliminary results for 1996 confirming a 21% drop in pre-tax profits to Ir£19.8m on a higher turnover of Ir£1.04bn.

Avonmore, conversely, has a much more diversified business and a more robust trading position. Its annual results showed a 14% rise in pre-tax profits to Ir£36.4m, with dairying and agri-trading both making positive contributions.

The Irish dairy industry has been plagued by over capacity, with too much dependence on commodity markets and intervention. And, like their UK counterparts, Irish dairy farmers have seen milk prices drop substantially in recent months, after green Ir£ revaluations.

This situation is expected to get worse. In its proposal to Waterford, Avonmore says: "The food sector is facing a period of enormous change which could have a very adverse affect on farmer incomes. This is compounded by the ongoing consolidation of the retail sector. International agreements will inevitably result in a liberalisation of trade and a reduction in support, leading to more intense competition. The Irish dairy sector needs to consolidate in the light of the above developments."

Avonmores "friendly" approach includes a "one for two" share offer. With Avonmores shares valued at 235p each, that gives an offer value of 117.5p for Waterford shares currently worth 100p.

To tempt Waterfords 5500 share-holders further, Avonmore is also proposing a 3.25p/gal (0.7p/litre) milk price rise. But Avonmore will not progress with the offer unless it is recommended to shareholders by the Waterford board. This week a spokesman told FW that Water-ford would not be rushed into a decision and was seeking clarification of the terms.

The outcome is far from certain. In their preliminary accounts, Waterford directors were already predicting improved margins for 1997, after cuts in milk prices on both sides of the Irish Sea. Mean-while, Irelands largest co-op, Dairy-gold, has said it "will do nothing to distract Waterford". This is widely interpreted as an overture to a possible approach, should the Avonmore deal fall through.

Reaction from producer organisations has been welcoming. Irish Farmers Association milk chairman, Liam Foley, said amalgamations were needed in the dairy industry and could yield substantial benefits to dairy farmers. &#42