The debacle of the Avonmore-Waterford merger, which created the corporate disaster that is Glanbia, shows that mergers in the dairy business do not necessarily succeed. The poor Glanbia shareholders holding stock worth a tenth of its value three years ago are testament to that.
It might be with the benefit of hindsight, but mature reflection leads one to conclude that the Avonmore-Waterford merger was fundamentally flawed from day one.
The carrot dangled to farmers to approve the deal was too generous. But that is only a small element in the debacle. Quite simply, Glanbia emerged from the merger as an over-indebted dairy group over-exposed to a viciously competitive British food industry, where the big retailers played one supplier against another to force down their costs - inevitably squeezing suppliers' margins in the process.
But the Glanbia affair does not mean mergers or rationalisation in the Irish dairy industry is a flawed concept. Everbody knows that Ireland has too many dairy processing plants and that the number of producers must be cut if dairy farmers and the co-ops themselves have a future. Whether that comes about through co-op mergers or shared facilities between various independent co-ops is irrelevant.
The end product must be that the Irish dairy industry's cost base must be cut, and soon, if Ireland is to remain competitive against slimline dairy industries in New Zealand, continental Europe and the United States.
Thankfully, some progress has been made in reducing the number of small dairy co-ops. NCF and Kiltoghert have already merged to create the Connacht Gold Co-op, with sales of £200 million (€254 million).
Now two of the small mid-western co-ops, Nenagh and Midwest, are on target to merge to create a combined group with turnover of just over £100 million. But the need for merger and rationalisation is emphasised by the fact that, between them, Nenagh and Midwest generated operating profits of only £642,000 last year. That represents operating margins of less than 0.6 per cent and no business can hope to operate successfully on those sort of figures.
One assumes the shareholder meetings of the two mid-west coops will give the nod to the proposed merger, but merging the two groups is only the first step. The difficult decisions on rationalising overlapping collection, processing and distribution operations will then have to be taken.
Merger for merger's sake is pointless, and the industry will be looking to Connacht Gold and Midwest-Nenagh to take the lead and show that dairy farmers and their co-ops are prepared to take decisions that need to be made if their members are to have any sort of a profitable future.
