DECISION time looms for Avonmore Foods and Waterford Foods as farmer shareholders, who hold the key to the proposed merger, start their crucial meetings this week.
Although rightly recommended by all the relevant bodies -IFA, ICMSA and Macra na Feirme - pockets of resistance still exist and it will only take 25 per cent to scuttle a very natural merger. It is therefore incumbent on all those who are in favour, or those who are wavering, to give it their seal of approval.
Failure to do so will leave both companies, particularly Waterford Foods, the poorer.
Combined, it will be a sizeable group with Pounds 2.5 billion sales, -it will have 34 per cent of the domestic milk pool and 15 per cent of the British milk pool. With plenty of over-lapping, there is lots of room for rationalisation this means plant closures and redundancies which should reduce costs by Pounds 10 million to Pounds 20 million. That should increase profit margins and combined operating profits could rise by 30 per cent to Pounds 125 million between 1996 and 1998. This would put the enlarged group into better competitive fetter to face the intense competition from former eastern European companies which will eventually join the EU, resulting in the level of agricultural support going down.
The proposed merger should benefit the local economies with an estimated Pounds 12 million flowing through as a result of the increased milk price and up to Pounds 90.5 million if the shares received in a spin-out are sold. It would benefit both the farmer and non-farmer shareholders alike.
Under most financial criteria the proposed split of the enlarged co- operative which is based on net assets is equitable. But what about the proposed 60/40 split, in favour of Avonmore Foods, in the enlarged plc?
The picture is very clear when the share price is taken into account. The recent rise in Avonmore's share price, for example, values Waterford at Pounds 380 million, or almost Pounds 100 million above the initial offer. If the offer is not accepted by the Waterford shareholders, this gain would evaporate pretty quickly.
Even on the historic figures, the proposed split appears fair enough. These can be viewed under three main headings; sales, operating profits and shareholders funds (net assets).
Avonmore's share of the combined sales in 1996 amounted to 56 per cent. On a three-year average this rises to 59 per cent, close enough to the split. Avonmore's share of operating profit last year amounted to 54 per cent. On a three-year average this is marginally less,
However, Avonmore, without Waterford, would probably do better than Waterford this year, with a rise in the percentage.
The two companies' net assets are not directly comparable because Avonmore has written off goodwill that has arisen in acquisitions whereas Waterford has goodwill amounting to a whopping Pounds 111 million, in its last balance sheet. If this is excluded, then Avonmore would account for 63 per cent of the combined net assets.
As the offer is a straight share swap, all the shareholders would benefit from the substantial savings. The farmer shareholders are being offered the carrot of an extra 3p per gallon on milk above the average price, of all creameries, other than Avonmore Waterford, participating in the Craig Gardner milk price audit. This is estimated to be worth Pounds 12 million.
On top of that there will be a share spin-out by Avonmore Waterford Co- Op (the enlarged co-op) valued at Pounds 90.5 million (Pounds 55.7 million to Avonmore and Pounds 34.8 million to Waterford). This would be effected by Avonmore Waterford Co-Op reducing its share in the plc from 65 per cent to 55 per cent (the farmer shareholders would have a further 20 per cent). Although the management of the two companies have noted that farmer control would not be diluted without approval by 75 per cent of the existing coop members at four meetings (two for each co-op), this dilution is being opposed by a Kilmeaden group.
The ingrained contention that farmers will have to keep a 51 per cent controlling interest will have to be overcome. That view is restrictive and it inhibits development. The farmer shareholders in lAWS and Kerry took the enlightened move to remove this restriction some time ago and they are real corporations as a result.
The enlarged plc would have borrowings of some Pounds 400 million giving a gearing of 60 per cent. The management's public view is that with the substantial cash flow (Pounds 110 million last year), this debt will be considerably reduced over a few years particularly as the anticipated savings come through and that there would be no need to reduce farmers control. Hopefully this is a cosmetic view to get the farmers to vote for the merger.
The enlarged group, of course, faces plenty of other problems. Apart from the commercial ones and the need to push rationalisation ahead at a fast pace, it would be lumbered with unwieldy boards. Indeed, the proposed sizes are mind boggling. The co-op board is to have 85 members. But the more important enlarged plc would have 36 members, with Avonmore taking the majority with 19 members and Waterford with 17.
How that sized board will work effectively is anyone's guess. Clearly that sensitive issue will have to be addressed before the enlarged group comes of age.
