30 May 1997

Share recommendation takes Irish dairy co-ops near merger

By Philip Clarke

A MERGER between two of Irelands biggest dairy co-ops – both with significant UK interests – has moved a step closer.

Having first rejected an approach by Avonmore in early April, the board of Waterford Foods this week recommended its members accept an offer for all the issued share capital.

The combined company – to be known as the Avonmore Waterford Group – will become Irelands leading co-op, overtaking Dairygold, with a total turnover of £2.36bn and world milk sales of 4.5bn litres.

In the UK, Waterford (which owns The Cheese Company) and Avonmore are ranked fourth and sixth, respectively, in terms of milk sales. Combined, they will have a milk pool estimated at 1.6bn litres, on a par with leading dairy company, Northern Foods, and overtaking Dairy Crest and Unigate with about 1.4bn litres each.

The new deal includes an offer of 29 Avonmore shares for every 50 Waterford shares. Based on this weeks Avonmore share price of 245p, this equates to a value of 142p for each Waterford share, a 78% premium over their last traded price.

This is substantially better than the original "two for one" offer made in April, which valued Waterford shares at 114p. The total offer is now worth £337m.

There is also a tempting milk price element, with Avonmore promising to bring the two co-ops milk cheques in line. This would mean a 4.25p/gal (0.93p/litre) increase for Waterford suppliers. But the company has no plans to make a similar equalising measure in the UK, where, according to the FW/Wye College Milk Price Review, Waterford has consistently paid more than Avonmore (by almost 1p/litre last milk year).

Avonmore believes it can make significant economies of scale through the merger. "The food sector is facing a period of enormous change which could have adverse effects on the incomes of farmers," it says. "These changes are compounded by the ongoing consolidation of the retail sector. International agreements will inevitably result in a liberalisation of trade and a reduction in support mechanisms, which will in turn lead to more intense competition."

Documents are being sent to the co-ops shareholders, and Waterford will have to demonstrate 75% acceptance at an egm to be arranged. This is likely to take up to two months, but the expectation is that the merger will be approved. &#42