Rejection of offer would require clear alternative

AVONMORE Foods' chief executive Mr Pat O'Neill is involved in a clever balancing act with his offer for Waterford Co op and Waterford Foods, an offer that Avonmore has valued at £281 million when the various components are taken into account.

On the one hand, Avonmore has had to pitch on offer that is financially attractive for Waterford shareholders and which takes into account the deep sensitivities of Waterford farmers about a perceived loss of independence. On the other hand, Avonmore cannot be seen by its own shareholders as being too generous.

Both groups will have to hold special general meetings if the proposals are to be approved. In the case of Waterford, the outcome of those special meetings - which require 75 per cent votes in favour of the proposals - will depend on the attitude of the Waterford board.

If the Waterford board endorses the Avonmore proposal, then that 75 per cent target is feasible. If it does not, then even sources close to Avonmore acknowledge that it would be virtually impossible to push the takeover through. For that very reason, Avonmore has made its approach conditional on getting the support of both Waterford boards - the co op and the plc.

It is understood that there are some on the Waterford boards who are opposed to the very concept of becoming a junior partner in the proposed Avonmore Waterford Co op, fearing the loss of control that would result.

But the Waterford board, especially its chief executive, Mr Matt Walsh, knows full well that if the company spurns the offer and the Kilkenny group walks away, then it had better have a clear alternative strategy that would provide the financial benefits that the Avonmore proposal would bring.

It is understood that Avonmore has valued the "farmer benefits" of the package at around £40 million, a very considerable sum at a time when farm incomes are falling.

With farmers and milk suppliers - on both sides of river Suir - deciding whether this takeover will succeed, Avonmore has clearly erred on the side of generosity. By any standards, the money on offer is substantial and offers Waterford's milk suppliers a substantially higher income than they would otherwise receive over the next three years. Avonmore has estimated that the milk price proposals would be worth £4,100 to Waterford milk suppliers in a single year.

Add in the sweetener of the spin out of almost £67 million worth of shares in the merged plc to all of the shareholders of the proposed Avonmore Waterford Co-op, and the financial attractions of the offer become more tempting.

They are also, tempting for Avonmore Co-op's own 13,200 shareholders who would receive almost £47 million worth of plc shares, with £20 million worth going to Waterford's 5,500 shareholders. At the current Avonmore share price, these spun out shares are worth an average of £3,625 for existing Waterford shareholders and £3,551 to existing Avonmore shareholders.

Irish dairy co operatives are characterised by deep local loyalties and emotional bonds. In framing its proposals on how many representatives either side would have on the merged boards, Avonmore has also made an offer that some of its own members might find difficult to accept.

Equal representation on the coop board goes a long way towards easing fears that Waterford shareholders may have about losing control of their company to their bigger local rival. Whether Avonmore's proposals on representation are attractive enough to get over the objections that are certain to surface south of Suir remains to be seen.

The one notable omission in the Avonmore proposal is the cost savings that the combination would bring. Analysts have suggested that a minimum of £15 million a year could be saved, sufficient to allow Avonmore Waterford to pay the promised premium milk price.

Using existing forecasts from analysts, factoring in the impact of £15 million worth of synergies and applying Avonmore's current price/earnings ratio, then an Avonmore share price of 300p is indicated. That indicates a price of 150p for Waterford Foods shares based on the one for two offer, more than double the recent 72p low and 90 per cent above the price at which the shares traded immediately prior to the announcement of the Avonmore approach.