THE Cork dairy co-operative, Dairygold, has made it clear that it will not become involved in a two-pronged takeover battle for the neighbouring Waterford Foods, which has received a £281 million takeover offer from Avonmore.

But industry sources believe that in a statement issued yesterday Dairygold sent a signal both its own shareholders and to Waterford shareholders that if the Avonmore approach is rejected, then there could be scope for some formal link-up, joint ventures or facilities-sharing arrangement which would generate the level of cost savings and might allow the milk price paid to farmers to be supported.

The statement from Dairygold's chief executive, Mr Den is Lucey, came after local speculation that the Mitchelstown-based co-op was contemplating a counter-bid for Waterford, a bid that could somehow be linked with Dairygold converting from a co-op to a public company.

In his statement, Mr Lucey said: "While Waterford is considering its response to the offer it has received, Dairygold will do nothing to distract it in that process." Even if the Avonmore approach is rejected by the Waterford board and the Kilkenny group walks away, industry sources believe that there is virtually no prospect of the debt-averse Dairygold merging with, or making a takeover bid, for Waterford Foods.

But the Dairygold statement referred to the "excellent and harmonious working relationship" between Dairygold and Waterford Foods and said that Dairygold "has a very keen interest" in Waterford's attitude to the Avonmore bid. This apparent hint at closer co-operation may now become a factor in the farmer discussions of the Avonmore bid.

But industry sources are sceptical that any link-up with Dairygold could generate the same benefits for milk suppliers as are being offered by Avonmore. Also, as a co-op, Dairygold has no shares to swap for Waterford Foods plc shares, so a takeover of the public company which owns the Waterford assets seems implausible.

Dairygold would also be unlikely to contemplate the level of debt required for such a bid. And as a co-op, Dairygold also does not have shares that could be spun out to Waterford shareholders, as Avonmore has proposed in its own package.

Industry sources suggested that Mr Lucey - who rarely makes comments on Dairygold's business outside the co-op's annual results - is instead trying to get a message to Waterford shareholders that there may be an alternative approach, other than being taken over by Avonmore.

Whatever Dairygold's motives for making its statement, most observers believe it will make it even more difficult for Avonmore to get the required 75 per cent approval from Waterford Co-op shareholders, even if Avonmore gets the support of the Waterford board.

Meanwhile, it is understood that there have been no substantive developments in the discussions that Waterford's finance director Mr Michael Dempsey is having about his future with the group. Mr Dempsey is understood to have not been present at the Waterford Co-op and plc board meetings which considered the Avonmore approach last Friday and he is not expected to attend next Friday's meetings of the two boards.