Dairy Crest’s ambition to sell off its loss-making milk operations to German yoghurt giant Müller for £80m inched closer on Tuesday after the Competition and Markets Authority announced that a major obstacle to the sale has nearly been overcome.
In a week when cows are being herded through supermarkets by irate farmers protesting against rock-bottom milk prices, two of the UK’s biggest dairies now look set to seal a deal that would leave the UK market dominated by three players: Müller Wiseman, Denmark’s Arla and the First Milk farmers’ co-operative.
However, the competition watchdog said in a statement that proposals submitted by Müller to help ensure the sector remains competitive post-sale – a major roadblock to completion – were “appropriate to remedy” its competition concerns over the sale.
The regulator said it now “proposes to accept” Müller’s proposals, which paves the way for the deal to go ahead.
The CMA had previously voiced concern over the effect that the sale would have on the dairy sector in the South West.
To address these concerns, Müller has offered to process some 100 million litres of fresh milk each year on behalf of one smaller rival, to supply to supermarkets in the South West, offering retailers the choice to buy milk from an alternative supplier.
Before reaching a final decision on whether to accept the proposals, the CMA is inviting third parties to submit their views on the suitability of the sale.
It has also extended the deadline for its final decision on whether or not to accept Müller’s proposals by 40 days to October 19. Once accepted, the CMA is widely expected to rubber-stamp the sale.
Mark Allen, chief executive of Dairy Crest, said the CMA’s acceptance of Müller’s proposals was a “positive step forward” that would still allow Dairy Crest to complete the sale to Müller before the end of the year.
He said: “We have always believed the sale of our dairies operations is good news for the whole UK dairy sector, which is currently facing significant challenges arising from low dairy commodity returns.
“It will deliver economies of scale and cost efficiencies that will underpin investment and help the UK compete more successfully in global markets.”
Clive Black, head of research at Shore Capital, criticised the CMA for not approval the sale outright.
“You are entering the mind-blowing, rarefied and seemingly unaccountable world of the CMA,” he said. “We have written before that the world of the CMA is where Arnaldo Ianucci meets Joseph Heller and this further confirms our view.”
Dairy Crest announced the sale of its liquid milk and dairies division to Müller Wiseman in November last year and the deal quickly gained shareholder approval.
Under the terms of the sale, Müller will take over Dairy Crest’s fresh milk, cream and butter operations, while Dairy Crest will retain its profitable, predominantly branded, cheese and spreads operations, including Cathedral City cheddar.
The sale will also allow Dairy Crest to focus resources on producing high-quality demineralised whey powder – a bi-product of the cheese-making process – for the fast growing global infant formula market.
Last year, the company signed a deal with the world’s biggest dairy exporter, Fonterra, to access the lucrative Chinese market for baby food. It is ploughing £45m into demineralised whey.
But Dairy Crest has been struggling to squeeze profits out of its dairies division, which has been loss-making in recent years. In the year to the end of March 2015, profits in the division plummeted by 90pc to £1.8m, despite revenues of £881.6m and significant cost-cutting. By contrast, the cheese and spreads operations enjoyed a 19pc rise in earnings
It has also been a difficult year for dairy. Fierce competition among supermarkets and an oversupply in the global milk industry has hit farmers and processors alike. Dairy prices are expected to fall further amid continuing oversupply in the markets, fierce competition and oversupply in the milk industry.
The abolition of European milk production quotas, which took effect from April 1, 2015, is another cause for concern for Dairy Crest. While UK production has been unconstrained by the quota system, milk production across the continent and Ireland is widely expected to ramp up, potentially leading to a greater volume of imports – including cheese – into the domestic market.
Dairy Crest believes that selling its dairies division to Muller will help to create a more sustainable UK dairy sector by delivering economies of scale and cost efficiencies necessary to compete in a low-margin industry where scale is vital.
By Julia Bradshaw