THE Avonmore/Waterford merger will take up to three years to fully consolidate. Then, informed sources say, once profitability has been boosted, the companies will use their combined weight to target the US market to grow the business.

Sources have told The Irish Times that the offer - which analysts have said is very generous - will result in a merged company which should be generating profits of £100 million per annum.

Such a target is riot unrealistic, they say, given that Waterford is on course to make around £25 million this year, with Avonmore set to turn in around £40 million.

The new company is not expected to be in a position to go on the acquisition trail until 1999, when all operations are bedded down and the company's debt has fallen to around £230 million at the end of 1998. At that time, sources say, the aim will be to have around £50 million a year in cash flow as the basis for investment in new opportunities. The reduction in debt over the next three years would give the new company the sort of balance sheet where very substantial acquisitions could be supported.

The task of integrating the two operations will fall to a team spearheaded by Avonmore's current chief executive Pat O'Neill and Waterford's chief executive Matt Walsh. Both men are highly respected with long experience in the dairy industry. It is unclear what Mr Walsh's exact title will be, but Mr O'Neill will be the chief executive of the tentatively titled Avonmore Waterford Group (AWG).

It is believed that a special "integration" management team will be working on merging the businesses. At a press conference earlier this week, the issue of tension between Avonmore and Waterford executives was raised. Mr O'Neill confidently predicted that within a couple of years, it will be impossible to distinguish who is a Waterford and who is an Avonmore man or woman.

The first task of the combined management will be to see what costsavings can be made through rationalising or combining operations. Earlier this week, Avonmore was at pains to stress that many of its 33 acquisitions since it floated have resulted in extra jobs.

However, undoubtedly the merged operation, if given the go ahead by shareholders, will result in job losses in some areas. Avonmore has indicated that savings of £10 million plus per year can be achieved.

Selling off the non core businesses is expected to raise £30 million. The fruit juice business, which Waterford bought in Britain, has under performed and is expected to be sold. In the US, Waterford has a dairy operation in Wisconsin called Galloway West, which is making only small profits. Avonmore also has dairy interests in Wisconsin.

The merger will give the new company a presence in every county in the Republic and every county in England. "It will be a very powerful machine," said one source.

Although it moved a crucial step closer this week, the Avonmore merger proposal was no surprise to the industry. Pat O'Neill and Matt Walsh would attest to the fact that they were asked every year at their annual general meetings about when it was going to happen. A previous merger attempt in 1991 failed when both sides could not agree a price.

A profits warning by Waterford to the Stock Exchange on April 10th, however, pushed the merger up to the top of Avonmore's agenda. It is understood that at the time Avonmore was targeting three or four acquisitions, mainly in the US.

One acquisition, Beni Foods in Britain - which Avonmore bought in February for £55 million - was already at an advanced stage and Avonmore did not want to pull out. This was the company's biggest acquisition to date, but it managed to secure a deal whereby payments will be phased over four years.

After the Waterford profits warning was issued, Avonmore executives quickly drew up a proposal which, sources say, Avonmore considered to be very fair.

Discussions between Waterford's advisers NCB Corporate Finance and IBI Corporate Finance (Avonmore's advisers) then took place over several weeks.

The parties met a couple of times per week and it is understood that the chairmen of both companies met once. From the outset Avonmore said it would not engage in a hostile takeover bid.

Matt Walsh and Pat O'Neill have known each other for at least 15 years. Ironically they grew up about 10 miles from each other. Mr Walsh lived in Inistioge in Co Kilkenny, while Mr O'Neill lived across the Nore in Co Wexford.

The two are said to have great respect for one another. Both lead very busy lives, and both play golf. Mr Walsh is an acknowledged golfer, with a single figure handicap. Mr O'Neill, who plays a little less often, has a handicap of around 15.

Mr O'Neill has been described by acquaintances as very competitive and outgoing. Mr Walsh is said to be slightly more retiring, but very competent and a tough businessman.

Both made it clear this week that the increasing competition and liberalisation in the international markets means that to survive and grow, such a merger is necessary.

Both men have a difficult task ahead of them. In Britain the dairy industry, where Waterford has a strong presence, has been hit hard by the BSE crisis. Although it appears to be receding, there is a perception. created by the crisis, that any dairy products coming out of Britain are somehow tainted.

Luckily, the combined dairy operations sell mainly into Britain. Avon more has pigmeat interests in Britain which export to other countries and are unaffected.

CAP and GATT reform will put further downward pressure on farm prices. Massive liberalisation in the US will mean big opportunities and more competition for the new company.

It is also understood that Avonmore believes the new company will be weighted towards the dairy side of the business, as opposed to the meat side. This is something which Mr O'Neill will want to redress as he believes that the group should have a spread across all sectors, to ride out the inevitable storms which arise from time to time.