Crunch time approaches for AWG workers

Crunch time is rapidly approaching for some 700 employees of the Avonmore Waterford Group (AWG), now in the throes of planning the rationalisation of Avonmore Foods and Waterford Foods. In order for the benefits of the merger to be realised, big dollops of costs will have to be taken out and these include the redundancies, the subject of delicate negotiations between the unions and management. Eight review teams are assessing the different sectors of each company and a report will shortly be presented to the group board. Savings can be made in a number of areas but the most obvious are distribution, production, liquid milk sites and head offices.

Distribution is an area where instant savings can be made. Each company distributes to the same outlets and this duplication can be quickly erased. The potential savings should be substantial. Combined, the companies spent in excess of £120 million on distribution. This is an area in which Dairygold, formed through the merger of Ballyclough and Michelstown co-ops, reaped quick rewards.

Production is another obvious area to benefit from rationalisation, although that could take longer. AWG has three plants. These are located in Ballyragget (Avonmore's milk processing plant), Kilmeaden (Waterford's cheese plant) and Dungarvan (Waterford's milk processing plant).

Ballyragget looks like the front-runner to have the production centralised at its plant, with Kilmeaden and Dungarvan possibly losing out, though there is likely to be pressure for them to be retained in some format.

Looking further ahead, AWG will have to move towards the single super-site in order to keep abreast of international competition. Avonmore and Waterford have some eight liquid milk sites between them. As these sites have to be reasonably accessible to the sources of supply, the benefits from rationalisation in this area must be limited.

However, another area is ripe for rationalisation. There is now no need to have two head offices. The group is already operating from Kilkenny (Avonmore's head office), which must put question marks over the retention of the Dungarvan centre (Waterford's head office).

However, this may be retained for some office duties. Administrative costs are running at around £60 million for the two companies, so savings through rationalisation of the head offices could be significant. Davy Stockbrokers, the group's broker, has estimated that rationalisation provisions will amount to £145 million and there will be goodwill of £111 million in the merged company's first accounts. The rationalisation is expected to result in about 700 job losses. The rationalisation costs are expected to lead to losses of £87 million and a loss per share of 103.9p in 1997. Importantly, borrowings amounting to £274 million would represent a hefty gearing of 265 per cent.

The annual net cash flow is estimated at some £50 million but this should be boosted from the proceeds of disposals. So provided there are no hiccups, the borrowing levels could be brought down pretty quickly.

The group is expected to return to a profit of £90.5 million and earnings per share of 23.2p in 1998. Earnings per share are expected to accelerate to at least 27.8p and possibly as high as 30p in 1999.

Avonmore Waterford needs to execute the rationalisation programme quickly. Putting it on the drip would spoil its plans to execute a development plan to prepare itself for the next decade. The merger of Avonmore and Waterford, making the combined group the fourth-largest dairy processing company in Europe and the seventh-largest in the world, may seem large in world terms. However, valued at £800 million, it is tiny when compared with the world's largest food groups.

Unilever (it has a large dairy division), for example, is over 50 times larger. Nestle is over 40 times bigger (its European dairy side is smaller than AWG's). Heinz is 15 times larger. Looking at the developments elsewhere, it is obvious that rationalisation will continue as large supermarket groups focus on a smaller number of the large suppliers. Campina/Melkunie, the largest European dairy group, processing 5,000 million litres (AWG processes 3,300 million litres), for example, recently acquired MKW of Germany. And Friesland and Coberco are proposing to merge, together with other smaller co-ops, to overtake Campina/Melkunie as the largest dairy group in Europe.

If the proposed rationalisation of Avonmore and Waterford progresses according to plan, then AWG will have to focus on further mergers. This should first be directed at the domestic market, which is ripe for further amalgamations.