The money is good but Waterford Co-op board has more to consider

MOST independent analysts who have studied the Avonmore takeover offer for Waterford believe the terms are generous. But concern has been expressed at the farm gate about the loss of independence that such a takeover would bring.

If the board does turn down the Avonmore approach and the Kilkenny Coop walks away, then Waterford will have to consider if an alternative partnership with Dairygold is feasible.

Denis Lucey's statement this week that Dairygold "would not distract" Waterford while it is considering the Avonmore proposal poses more questions than it answers, and has led to speculation that Dairygold is holding out the prospect of some sort of link-up with Waterford if the Avonmore approach is rejected.

Quite what shape or form such a link-up between a co-op like Dairygold and a co-op controlled public company like Waterford is not clear.

The Waterford board and Waterford's own shareholders must, however, balance any desire for continued independence with the financial benefits that the link-up will undoubtedly bring for farmers supplying both co-ops. In mulling those conflicting aspirations, the board might like to focus on some specific questions:

Does the board accept that it has an obligation to show strong leadership in the current situation, and does it have the will to tell shareholders of the Waterford Co-op, in particular, facts that they might find unpalatable?

Waterford chief executive Matt Walsh has gone on record as advocating rationalisation in the industry. Does that mean that he and his Waterford board colleagues might accept a rationalisation in which it will be a junior partner, or will Waterford only become involved in a rationalisation where it will be the majority party?

Avonmore has proposed to equalise the milk price for both sets of suppliers, to absorb the cost of the latest green pound revaluation rather than pass it on to farmers and to include Waterford farmers in its patronage bonus scheme. These proposals on milk price have been valued by Avonmore at £11 million and by analysts at a minimum £9 million. Avonmore has also proposed to pay 3p a gallon over the average milk price in 1997, 1998 and 1999.

If the board rejects the approach and Avonmore walks away, what alternative proposals has the Waterford board got to provide the same milk price benefits for its suppliers?

Does the board believe that the plc's institutional shareholders and its own bankers - whose covenants have already been breached - will accept any alternative proposal that would support the milk price to an extent that would provide the benefits of the Avonmore proposal?

Avonmore has proposed that the boards of a merged co-op - which will have the ultimate say on milk price - will have equal representation by Avonmore and Waterford farmers. This would appear to positively discriminate in favour of Waterford farmers. Does the board believe that this split adequately safeguards Waterford's interests, or will the group wait until it is in a position of strength to try and negotiate a more favourable deal?

Waterford Foods plc is valued at 117p per share based on the Avonmore share swap proposal. That price is higher than the Waterford share price has been for almost 3 1/2 years and is over 60 per cent above the recent 73p low. Since 1993, Waterford Foods shares have consistently underperformed - the Irish market, having floated at 64p nine years ago and closed at 73p immediately prior to the Avonmore proposal being revealed. In roughly the same period since flotation, Avonmore shares have risen from a flotation price of 75p to the 235p this week.

Does the Waterford board believe that it has the strategy, the finances and the management in place to reverse that negative trend in the share price, if it chooses to remain an independent dairy group?

Since going public, Waterford has spent £374 million on acquisitions mainly in Britain and the US. The Galloway West business in Wisconsin - bought for over £40 million in 1989 - is now for sale as is the British fruit juice business. Premier Dairies in Dublin has had difficulties in the past year, while the jury is still out on the £125 million Cheese Company acquisition.

Is the Waterford board happy with its acquisitions record?

Since Avonmore went public in 1989, it has spent £106 million on acquisitions, the single biggest being the £22 million acquisition of the Perry Barr milk business in Birmingham. Avonmore has negligible debt.

Waterford has debts of £210 million and has already admitted to breaching its interest cover and gearing covenants with its banks. Is the company happy that it now has the financial controls and manpower in place to prevent a recurrence?

Waterford has a stretched balance sheet, enjoys little confidence among institutional investors and has had to repair relations with its banks after breaching covenants. Does the board believe that the group has the financial wherewithal to restore its fortunes?