AVONMORE Foods' plans to create a £600 million Irish dairy giant with sales of £2.5 billion through a merger with Waterford Foods are likely to face strong resistance from sections of the Waterford membership.

With sales of £2.5 billion and a spread of interests in the dairy, beef and pigmeat industries, the merged group would rank among the largest in Europe.

It is understood that some members of the Waterford board expressed strong opposition to the very principle of a merger with Avonmore, which would have valued Waterford at £217 million but which have made Waterford very much the junior partner in the enlarged foods group.

Yesterday, in an early morning announcement, Waterford told the Stock Exchange that it had received an approach from Avonmore which might lead to an offer for the Dungarvan-based group. It is understood that the previous evening, Avonmore chief executive, Mr Pat O'Neill, communicated his group's intentions to Waterford chief executive, Mr Matt Walsh, but the detailed proposals were only sent yesterday.

While both sides remained silent on the terms of proposals, it is understood that they include a merger of the two co-operatives based on their respective asset values and a proposal to swap one Avonmore Foods share for every two Waterford shares. This proposal values Waterford at 117p per share or around £220 million based on the Avonmore share price yesterday.

This compares with the 8op that Waterford began trading yesterday and the loop at which the shares closed on the Dublin market yesterday. It also compares with the 73p at which the shares traded after its poorly-received profits warnings two weeks ago.

It is also understood that Avonmore has also proposed that the enlarged co-op would transfer about a fifth of its 65 per cent holding in the merged public company directly to shareholders in the enlarged co-op.

At the current 235p price of Avonmore in the market, this would mean that upwards of £60 million of plc shares would be transferred to shareholders in the merged co-op, with about one-third of this allocation going to the existing Waterford Co-op shareholders and the balance going to existing Avonmore shareholders.

Avonmore is also thought to have offered to pay a premium price for milk. The Kilkenny group currently pays 1.3p a gallon more than Waterford for milk and its merger proposal is thought to include a commitment that Waterford suppliers would receive similar treatment. Avonmore is also thought to have indicated that farmers would also receive some of the estimated £20 million cost savings that the merger would generate through rationalisation of overlapping processing and milk collection operations.

The group thought to be opposed to the merger fears loss of control of their business to a management that would undoubtedly be dominated by Avonmore. If any substantial grouping does emerge to oppose the Avonmore proposal the 75 per cent voting requirement could make it very difficult to secure approval from Waterford Co-op shareholders.