A merger between Avonmore and Waterford Foods would be a major step forward for the entire dairy industry. The need for a rationalisation in the sector has been recognised for years and while there have been some moves in this direction, progress has been slow. A merger between the two companies would create a business with sales of over £2.5 billion and operating profits of over £100 million. The resulting gains in efficiency would be likely to offer a better return to farmers and provide the kind of scale needed to compete in the international market place.
The news of Avonmore's approach to Waterford Foods was first announced early yesterday morning, when Waterford told the Stock Exchange that it had received an approach which might lead to a merger or takeover. By last night it was clear that it was far from a done deal, with some resistance in Waterford Foods to Avonmore's proposals. There may be a feeling in the Waterford company that given the difficulties it has experienced recently, it is in a poor position to negotiate. After all, it is just six years since merger negotiations between the two companies, which would have given Waterford the larger share in the enlarged entity, broke down.
The full terms of the Avonmore offer have still to be published. However, in outline, the shareholders in Waterford Foods are being offered a stake in a new, larger company. Farmer shareholders own the bulk of the shares in Waterford Foods and Avonmore is believed to be indicating that they would receive a higher price for milk after a merger. In addition, Avonmore is offering to transfer a part of the shares of the new merged entity to the farmer shareholders. All in all, it appears to be a deal which Waterford Foods must seriously consider in the interests of shareholders and farmers.
The benefits of rationalisation in the dairy sector are clear, particularly at a time when milk prices remain under pressure. A merger between Avonmore and Waterford Foods, for example, would create one of the largest diary groups in Europe. It would control an estimated 34 per cent of the Irish liquid milk pool.
Because the product range of the two companies is similar, savings should be possible through pooling resources. The resulting economies of scale would boost competitiveness and the enlarged entity would be better able to afford necessary investment in areas such as production technology and marketing. Job losses would, however, inevitably accompany any merger. The ball is now firmly in the court of Waterford Foods and last night the company indicated that it would consider the Avonmore offer. Further meetings of its plc and coop boards are expected next week. Given the scale of the planned merger, Waterford Foods is not likely to be hurried into any decision.
Waterford Foods must, of course, weigh the Avonmore offer on its merits and decide on the appropriate course of action. Looking at the sector as a whole, however, it is clear that mergers and rationalisations are essential to underpin its future. A link up between Waterford Foods and Avonmore could trigger further moves throughout the industry, as other companies would come under competitive pressure from the new enlarged entity. But it remains to be seen whether Avonmore and Waterford Foods can lead the way.