Glanbia's new joint venture with Leprino, the world's largest cheese manufacturer, is a major move towards concentration on the international cheese and nutrition divisions of the troubled food group.

It buys the group cutting-edge technology, provides for expansion in its valuable European pizza cheese operation and is a welcome financial injection, at a time when resources are rather scarce.

Glanbia, the brightest star in the milk firmament four years ago when it was formed through a merger of Avonmore and Waterford plcs, quickly became a lacklustre performer.

The new group was projected to have sales of £2.5 billion (€3.2 billion), operating profits of more than £100 million and a huge cash flow. It would be the fourth largest dairy group in the world, would have over one-third of the Irish milk pool and 15 per cent of the milk market in Britain.

Acquisitions of £200 million or more were on the cards post-2000. Some 1,300 jobs would be shed in Ireland and Britain, there would be rationalisation and streamlining of processing and liquid milk facilities and a consolidation of companies which had been acquired.

Within weeks of becoming group managing director in 1999, Mr Ned Sullivan was issuing a profits warning for the year. The share price dropped dramatically and has not recovered yet.

In 1996, before the two companies merged, they reported profits that combined were around £90 million (€114 million) - in 1999 it was £46 million (€58.5 million). But many of the efficiencies and economies of scale that were projected failed to materialise. It was, as one industry expert says, "a serious mismatch between the blueprint and the actual performance".

Pre-tax profits of £60 million in 1997 were turned into a net loss of £109 million because rationalisation and restructuring resulted in an exceptional charge of £160.8 million. The pre-tax profit in 1998 was £75.3 million (€95.7 million).

Some blame the merger with Waterford Foods because of the high price Avonmore paid, essentially valuing Waterford at €600 million. Added to this was the commitment to farmers that they would be paid for their milk at the average price of a group of other dairies, plus 3p a gallon extra. It is now accepted that the debts incurred in the merger and rationalisation would not be a problem but for the fact that profits pretty well collapsed, for three reasons: the problems in the liquid milk market, in Britain as well as in Ireland, and the cyclical nature of the pig meat market. However, cheese, ingredients and food service were still performing well.

Others blame the messy rationalisation and redundancy programmes - and a series of changes in top management within the group. In hindsight, Glanbia's management should have seen what was happening in Britain - supermarkets consolidating to cut down the number of their suppliers to three or even two. It became inevitable that Glanbia had to sell its business in Britain.

At home, liquid milk is not the most profitable product. Where a couple of years ago, the group was making £4 million profit in this sector, it probably made a loss last year. Glanbia is heavily dependent on liquid milk, controlling at least 50 per cent of the market, with the figure rising to 70 per cent in the Dublin region, but margins are very slim.

Where 10 years ago, there was a net margin of around 10p a gallon, 2p would be good now.

It was with the rationalisation of liquid milk into two instead of seven plants and the closure of the Rathfarnham liquid milk plant in Dublin that things went seriously awry. It took more than two years to close the Rathfarnham plant and probably cost the group £10 million.

Centralising liquid milk at Drogheda in Co Louth and Ballytore in Co Kildare, was problematic initially, leading to quality problems, labour costs in excess of those budgeted for and inevitable losses.

Another problem which affected cash flow was the bad debts accumulated with liquid milk agents. A figure of around £4 million may still be outstanding. On the manufacturing side, the move to centralise all processing at Ballyragget in Co Kilkenny is regarded as having gone well. Savings projected for last year and this year can be achieved, but the efficiency of milk processing is not visible in the accounts yet because, as one analyst puts it, "the numbers are so full of exceptional items and so many people have come and gone".

The trading division has been performing really well under the direction of Mr Billy Murphy, who now has moved to take over the milk division.

However, not all the group's acquisitions were for the best. Waterford acquired the Cheese Company in Britain, which did not yield sufficient profits to cover the investment in the company. Avonmore's meat processing has also not fared well - 1998 was a bad year for pig meat; the beef and lamb factories have now been sold off.

Glanbia appears to lack a wide enough range of consumer products and many in the industry believe that insufficient money is being spent on branding and product support, as well as on R & D.

International cheese and nutrition, the key areas for development, require new technology which, if it cannot be sourced within the group, will have to be bought in. This is why the Leprino link-up is so important. This applies equally to R & D which, if the group cannot afford it - and it probably cannot at present - will have to be bought in.

Already a new nutrition product, Proven, which is a concentrated whey powder, is proving very successful as a supplement for athletes in the US. Apparently, the group could sell twice as much if it had the capacity to produce, but it has little money for expansion.

Current borrowings are thought to stand at around €500 million, including €50 million in the co-operative and preference capital. However, strapped for cash, Glanbia has broken none of its bank covenants, although this has restricted what it can spend.

Will Glanbia break even in the current year? Yes, the analysts predict, but to restore confidence in the shares, it is the level of profits that will be important. The benefits from improved world market prices for butter and milk powders may not be seen until after next March when the milk price agreement with farmers lapses.

Meanwhile, the group has to demonstrate its capability to run its assets efficiently; what the future holds is inextricably linked to a much better performance of the existing asset base. Investors do not just want to see a recovery but want results taken to a level at which the merger was predicated or in excess of it.

A better indication of how things are going will emerge when interims are posted in a couple of weeks.

Glanbia is not the only one of the former co-operatives not to have performed well since becoming a plc, begging the question of whether these businesses, which are very little extended beyond the farm gate and where farmers continue to hold influence, are suitable for the stock market.