THE board of Avonmore Foods are holding a crucial meeting in Kilkenny this morning on whether to improve the terms of its offer for Waterford Foods.

Informed sources, however, have indicated that the board is unlikely to make a final decision on improving its offer to a level that would entice the Waterford board to lend its support to the proposal to combine the two.

The Waterford board has already rejected the existing Avonmore offer, which values Waterford at £281 million and which is priced at a substantial premium to Waterford's price in the market. The Avonmore offer values Waterford shares at 117 1/2p each, while Waterford shares closed on Friday on 95p.

When the Waterford board rejected the Avonmore offer it said that it does not reflect the underlying value of the Waterford business, its strategic positioning in key markets and the contribution it can make to any merged entity in the future. . .if Avonmore sees fit to make an equitable proposal, it will in the interests of all the stakeholders, be considered by the boards of society and the company".

It is understood, however, that the Waterford board found the Avonmore proposal wanting in virtually every respect - and not just on the value it placed on the Waterford business. Milk price and representation on boards and committees were other elements of the proposal that the Waterford board found unacceptable.

But while sources believe that the Avonmore has some scope to improve its offer, they also believe that the board and chief executive, Mr Pat O'Neill, would be acutely aware that they would have to sell any improved offer to their own shareholders.

Just as it would take a 75 per cent vote of Waterford Coop shareholders to approve any proposal, it would require the same majority of Avonmore Co op shareholders for any improved offer Mr O'Neill said this week that at various meetings of his own coop shareholders in recent weeks, there was not a single dissenting voice against the proposal to combine with Waterford. Sources believe, however, that the Avonmore board might not find it so easy to sell the concept of an improved offer to its shareholders.

Avonmore has made it clear, however, that irrespective of the outcome of its merger proposal with Waterford, it plans to proceed with its project to become a major player in the British meat and dairy industry and the American cheese industry. The acquisition of Beni Foods in Britain for a total of almost £55 million is as strong a signal as it is possible to give of Avonmore's intentions to expand outside Ireland.

Some analysts believe that, whatever about the benefits of a rationalisation in the Irish dairy industry, Avonmore might be better served by expanding its operations in Ireland rather than becoming involved in a merger with a company which has over £215 million in debt, has made some questionable acquisitions and which has breached banking covenants and is in danger of breaching them again unless it sharply reduces its milk price.

All economic and business logic points in favour of the Avonmore offer, seen everywhere outside of Waterford as generous. There is a growing belief that any proposal from Avonmore would find it difficult to get 75 per cent support.

Institutional shareholders in Waterford Foods are growing increasingly angry at the way they believe their interests are being ignored - to the benefit of Waterford's milk suppliers and co-op shareholders. Waterford's rating among investors is now at an all time low and would undoubtedly fall even further if Avonmore decided to walk away from a merger.