A company with sales of over £2.5 billion and operating profits of over £100 million would result from a link-up between Avonmore and Waterford - whether it is described as a takeover or merger. But even the financial logic behind such a link-up does not mean that the £600 million merger between Avonmore and Waterford will take place. The prospects for a "friendly" merger last night were not promising.

Waterford was keeping its response to the Avonmore approach very much to itself last night. But the indications coming from both its plc and board meetings was that the response was negative with sections of both boards thought to be voicing strong objections to the proposals from Avonmore.

Whether this simply represents a tactical approach by Waterford, aimed at forcing an improved offer from Avonmore is not clear. But it is understood that there are some on both the plc and co-op boards who are opposed to the very principle of a merger, where Waterford would be very much the junior partner.

Any changes in Waterford's corporate structure will have to be approved by two special general meetings of the co-op, with 75 per cent of those attending and voting, in favour of the proposal. Sources believe that unless the board of the co-op rows in enthusiastically behind the Avonmore offer, then it would be extremely difficult to get the required 75 per cent acceptances, whatever about the financial inducements.

If that is the case, then it will fall to the board of Waterford Foods and Waterford Co-operative to state clearly why the Avonmore offer is unacceptable Avonmore is understood to have made detailed proposals, including swapping one of its own shares for every two Waterford Foods shares.

The proposals also include details of representation on the board and management committees of the enlarged board - which would give the Waterford side of the enlarged company greater representation than would otherwise be warranted

The proposals also include a mechanism where the enlarged co-op would transfer part of its ensuing 64.9 per cent stake in the enlarged plc directly to co-op shareholders. It is understood that the parent co-op of the enlarged plc would transfer a fifth of its holding directly to co-op shareholders.

This would mean that about 27 million shares worth about £60 million, depending on the share price, would be transferred directly to shareholders in the enlarged co-op. About one-third of these - worth around £20 million - would go to existing Waterford Co-op shareholders and the balance to existing Avonmore Co-op shareholders.

On milk price - probably the most important single factor for farmers facing a severe cut in their incomes - Avonmore is thought to have told Waterford that the milk suppliers to the enlarged group would receive at least the price now being paid to Avonmore suppliers. This is understood to be 1.3p a gallon ahead of the Waterford milk price.

It is also understood that farmers have been given a strong indication that the enlarged group will pay a premium price for milk, with farmers getting some of the benefit of the estimated £20 million savings that the merger would generate. Analysts have estimated that savings of 4-5p a gallon could be generated, with farmers likely to get between an additional 2-3p.

"Avonmore knows full well that it is farmers - their own and Waterford's who will decide what happens. That's why Avonmore has emphasised the positive impact on the milk price and also the co-op shares in the plc that will be transferred to farmers in the enlarged group at a time when their incomes are falling," said one source.

But within the Waterford boards, there is thought to be a substantial rump opposed to a merger with Avonmore at any cost. These members are resentful of the fact that just six years ago, a merger was mooted which could have given Waterford 55 per cent of a merged group with, Avonmore.

Waterford's insistence on a 60 per cent stake scuppered those merger talks, but since then the" two groups have enjoyed contrasting fortunes, with Avonmore now valued at £410 million compared to Waterford's £187 million. And, in contrast to Avonmore which, ended 1996 with negligible debt and plenty of scope for acquisitions, Waterford ended last year with a debt/equity ratio of over 100 per cent.

"The comparisons between the two balance sheets couldn't be more stark, Avonmore has all the capacity to do big deals, Waterford will be spending the next few years simply reducing its debt and attempting to consolidate. "All, the logic is in favour of the two getting together, but logic doesn't always, dictate in these situations, said one source.