A MERGER of Avonmore and Waterford operations would be a major wake-up call for the Irish dairy industry. In an environment of falling milk prices and with investment needed in new technology, an operation that could significantly reduce its unit costs would have a big advantage over its competitors.
If the Avonmore offer for Waterford is accepted it is likely to trigger other moves within the sector. A merger between the Cork-based Dairygold and Golden Vale operations is a possibility and there is scope for a number of mergers and takeovers involving the smaller dairy co-operatives. "Pain is the only thing that will push them together," one analyst commented yesterday.
An Avonmore/Waterford operation could cut costs by £15 million to £20 million through rationalisation and redundancies. These savings would allow in vestment which would generate further operating efficiencies - a top-of-the-range skim milk dryer could be put in place, for example - allowing further cost savings.
Savings would also allow, the operation to intensify competition in the milk market by paying farmers more for milk, a move which would put its competitors under pressure. Goodbody analyst, Mr Liam Igoe, estimated that an Avonmore/Waterford merger could result in savings of 4p to 5p per gallon and that the operation could pay farmers 2p to 3p more per gallon for milk.
If the cost of their milk raw material is pushed up many of the smaller dairy co-operatives would come under intense pressure. To survive they would have to look to mergers to achieve cost savings or some may be taken over by the bigger dairy operations.
Pushing up milk prices within the current quota system would put pressure on the bigger dairy operators too. In an industry where margins have been shrinking for some time, industry analysts said that most of the bigger operators have already done all the cost-cutting they can do within their own operations.
Plcs which have diversified outside Irish dairying have been in the strongest position to match milk price increases paid by the co-ops to suppliers, he said.
The Irish dairy sector is currently dominated by the big five players, Avonmore, Waterford, Dairygold, Golden Vale and Kerry. Each of these has milk pools of 150 million gallons or more. In the second layer, players including Lakeland, North Connaught Farmers, Nenagh Co-op, Tipperary Co-op, Mid-West Co-op and Wexford Co-op, have milk pools ranging from 20 million gallons to 60 million. There are a number of smaller layers with milk pools of 10 million to 15 million gallons.
Avonmore and Waterford together would process about 34 per cent of the Irish milk pool, about 360 million gallons, giving it dominance in the market. The next biggest operator would be Dairygold which has about 20 per cent of the market, followed by Golden Vale with about 14 per cent and Kerry with around 10 per cent.
In Dublin a combined Avonmore/Waterford would have over 70 per cent of the liquid milk market, a position which could result in the deal being challenged by the Competition Authority.
Avonmore and Waterford are a good match. Amalgamating the operations would generate significant synergies through removing duplication in operations and administration. The companies are close geographical neighbours in Ireland and both also operate in Britain and the US. They have similar product ranges.
In Britain the operations are more complementary than overlapping. Avonmore has 25 per cent of the liquid milk market in Birmingham while Waterford has 25 per cent of the Manchester market. Waterford has the biggest cheese manufacturing operation in Britain producing 60,000 tons while Avonmore produces 35,000 tons. In the US both have cheese operations in Wisconsin.
