Merger to result in asset swaps

THE proposed merger of Avonmore Foods and Waterford Foods is likely to result in a round of asset swaps in the combined group's British liquid milk business, according to an analysis of the merger by ABN Amro's stockbroking arms in Dublin and London, Riada and Hoare Govett.

In its analysis, Hoare Govett states that Avonmore should be able to turn Waterford's British liquid milk operations into efficient processing operations for supermarkets. The broker adds, however, that both of the Waterford liquid milk businesses in Manchester and Durham are poor quality assets and are heavily skewed to the doorstep market.

"As such, they look prime assets for entering into a further round of inter diary swaps of processing plants, doorstep rounds, depots et al. . . which are also likely to involve MD, Northern Foods and the co ops."

Hoare Govett also believes that the merged group has scope for plant closures in Britain including the Waterford whey plant in Appleby and Avonmore's two small cheese plants in Llangefni and Whitchurch.

Riada analyst, Mr Joe Gill expects the merged group to streamline its Irish dairy operations to produce net savings of £8 million after paying the £12 million milk price premium. Assuming cost savings result in margins increasing from 3.9 per cent to 4.9 per cent, Avonmore Waterford could generate operating profits of £125 million in 1998.

With group cash flow of £167 million and free cash of £45 million, the merged group could reduce debts to £230 million by the end of 1998 and to less than £90 million by 2000. "This would imply the potential to spend over £150 million without reverting to shareholders while maintaining gearing below 50 per cent," says the Riada analyst.

. Meanwhile, Waterford has embarked on an information campaign to persuade its 5,500 co op shareholders to approve the merger. Waterford has set up a central freephone information line for shareholders at 1-800-374757.