Departing AWG head predictsc industry shake-up

At the end of March when Pat O'Neill retires as chief executive of Avonmore Waterford - soon to be renamed Glanbia - he will leave behind a food company that will be immeasurably larger than when he took over as chief executive in 1993. And the merged Avonmore Waterford will be 10 times bigger than when he took the then Avonmore Foods to the stock market in 1987.

What does he expect to be best remembered for after more than 25 years with the Kilkenny company. "I suppose the merger is what people will remember most because that has been a quantum leap for the business," he says, but adds that much earlier in his career he was closely involved in major milestones in the food industry such as the transfer of Bord Bainne from a State company to a co-opowned co-op in the early 1970s.

While the merger between Avonmore and Waterford Co-op in 1987 was the single biggest rationalisation in the sector, Pat O'Neill was also instrumental in the merger of 15 small co-ops in the south-east in 1976 to create Avonmore Co-op.

But the AWG boss concedes that the pace of rationalisation in the Irish dairy industry has been painfully slow, and will have to speed up if the industry is to remain competitive with the rapidly consolidating European, US and Antipodean industries.

"There is now serious talk of the biggest coops in Australia and New Zealand merging in the next two years, and if New Zealand's marketing skills are plugged into Australia's enormous firepower, then we will really need to be on our bikes," he states bluntly.

"Look at what's happened in Ireland. In 1990 we had the Dairygold and Lakeland mergers and nothing since until Avonmore and Waterford merged. And since we merged, we have had no other moves. But I think CAP reform and the Agenda 2000 proposals will force the pace.

"Take our Ballyraggett plant as an example, it will process 200 million gallons of milk. The total milk pool is 1.4 million gallons - that's seven Ballyraggett's yet we have 40 milk plants for that. In the UK there are 100 milk plants for 2.5 billion gallons. That is not a recipe for success," he states.

But he believes that the impetus for consolidation in the Republic will only come when the farmers who own the co-ops feel the pinch. "The barrier on the dairy side has been good incomes for dairy farmers compared to livestock farmers. Once farmers are content with their income they're not inclined to change. But when downward pressure comes on dairy farm incomes, I think you'll see more people saying we can't go on as we are."

It is not just in the Republic that the AWG chief executive sees consolidation becoming more pronounced. He believes that international mergers involving Irish companies cannot be ruled out.

"We've seen what's being talked about in Australia and New Zealand, we have seen coop mergers in America to create companies with more milk than the entire Irish milk pool. Noises are already being made in Europe, especially in the Nordic countries. They have a common culture that makes their link-ups more logical.

"Our logical partners are in the UK, but the situation is more difficult because most of the big dairy companies are public companies and that would bring out the issue of farmer control. It's possibly easier to do cross-border deals with countries like France, Holland or Denmark where there's a strong co-op ethos and movement. Merging with a foreign co-op would mean that the merger partners and their farmers would be sharing ownership of the same co-op."

But Mr O'Neill acknowledges that Irish companies are unlikely to be leaders of any movement towards cross-border mergers. "There's a long distance to go, but when it happens in Europe we will take note and see how the outlook changes. But I don't think Ireland will be a leader in forging cross-border alliances. We are more likely to learn from what happens elsewhere and then take the initiative after seeing it work in other countries," he states, adding - with deliberate emphasis - that the Avonmore Waterford Co-op majority stake in AWG is likely to remain "for the foreseeable future".

In Britain, however, he expects to see far more rapid consolidation. "We have six dairy companies in the UK, five of which are plcs plus five significant retailers. It's not a balanced budget, we've been saying continually that we need to see the industry in the UK reduced, probably to three players, possibly four, but ideally three." Needless to say, he expects AWG to be one of those three or four groups which remains part of the British dairy industry.

"In the UK there has been a significant margin squeeze, and when people get that margin squeeze they are slow to pay out money for substantial acquisitions. All that does is give once-off synergistic benefits. A more sustainable shape in Britain is to have regional strengths, combining assets on a regional basis to get a permanently lower cost base than any of the major players have today. All of us in the British dairy industry are passing each other in the streets, and passing each other on the roads collecting milk.

"Gradually they have been tidying up, buying smaller assets in their own areas, but there has not been any dramatic repositioning yet. That's a job for the next two years, I'd be very disappointed if by the end of next year we don't see big changes in the shape of the industry in Britain."

AWG's dairy business in the US, based in Idaho, is also set for strong growth. This has been a spectacular success for AWG and has more than made up for the disappointments that both Avonmore and Waterford encountered when they bought into the Wisconsin dairy industry in the late 1980s.

With a $35 million (€31 million) investment programme now in train, AWG's cheese plant in Gooding, Idaho, is set to become one of the biggest cheese plants in the world with annual production of 80,000 tonnes. Total cheese production by AWG in Idaho will reach 120,000 tonnes - one and a half times the entire production of cheese in the Republic.

"We moved into Idaho because milk supplies were moving west and the population is gradually moving west. We looked at California - it has a market of 50 million people, but it had water and effluent problems - but decided on Idaho. What we produce there we sell into the west coast - California, Oregon and Washington state."

Overall, given its strong market presence in dairy, lamb, pigmeat and beef in the Republic, AWG's expansion will have to be abroad. "We have to face reality, major development has to be overseas. We're saying that in five years we need to double the size of the business through organic growth and acquisition, I don't think that's an unrealistic target. The challenge is to balance repeatable income in the core business with expansion.

"There will be huge growth in food service in the next five years [something that probably explains Pat O'Neill's presence on the Campbell Bewley board as a non-executive director]," he says. He also believes that the consolidation in the retail trade presents more opportunities than setbacks to a food producer like AWG.

"There has been a progressive move by retailers to rationalise their supply base, to have fewer and more reliable suppliers. There will be competitive pressures but there are also significant opportunities to displace a plethora of smaller suppliers to the retailers internationally. The challenge is to be able to guarantee a top class, consistent product."

But he believes that with the merger complete, with the rationalisation in the Republic and Britain likely to be completed by June, with new chief executive, Mr Ned Sullivan, taking over in April - "a seamless transition," - with huge cash flow generation and a new name, "the structure is now in place as a base for tremendous growth".

And what will Pat O'Neill be doing during that period of growth? For one, he will not be on the Avonmore board looking over Ned Sullivan's shoulder. "A new chief executive is entitled to a clean sheet without his predecessor looking on," he says.

But he will not be retiring to the golf course. As well as being a director of the soon-to-merge Irish Life & Permanent and Campbell Bewley, he may take on a small number of other directorships - "at most four or five". He also intends to act as a mentor to small and start-up companies. "If you've been fortunate to work successfully in a large business, you have to put something back."

As he leaves AW House on the Kilkenny ring road "we're the only town in Ireland with half a ring road" - Pat O'Neill leaves Avonmore Waterford in good shape. The stock market might still be putting a question mark against the AWG shares, but he says: "Once the market sees what we are doing, then it may respond."