Dairy Crest’s sale of its dairies division to rival processor Muller faces a more in-depth investigation, after a competition ruling.
The Competition and Markets Authority (CMA) has said the £80m deal could cause higher fresh milk prices for retailers and shoppers.
It would leave Muller and co-operative Arla as the only firms big enough to supply the largest UK supermarkets.
The CMA has said the merger would face a six-month “phase 2″ investigation, unless Muller offered “acceptable undertakings” to address the competition worries.
CMA senior director mergers Sheldon Mills said the deal would remove the rivalry between two big suppliers of fresh milk in some parts of the UK.
“Unless the businesses offer undertakings that resolve the competition concerns, this transaction will face an in-depth investigation to ensure that the merger of two of the largest UK dairy companies will not result in higher prices for national grocery retailers and, ultimately, for consumers, for whom milk is an important everyday purchase,” he said.
In a statement, Muller Wiseman said it had expected the initial CMA decision and looked forward to working with the authorities.
Muller Group CEO Ronald Kers said the rationale for the transaction was perhaps even stronger, given the growing challenges in the fresh milk industry.
“We remain convinced of the need to increase our competitiveness, ensuring that customers continue to receive a quality product at a low price, while continuing to pay farmers fairly,” he said.
“We can achieve this by bringing Muller Wiseman Dairies and Dairy Crest’s dairy operation together, leading to better efficiencies.”
Dairy Crest’s dairies division has been dogged by low margins in the highly competitive liquid milk market.
In the year to 31 March, the department’s sales dropped 6.7% to £881.6m and profits were down 90% at £1.8m.
City analysts have approved of Muller’s buyout, which would leave Dairy Crest as a smaller, more profitable, brand-focused business.
The deal, which was proposed in November, would see 700 Dairy Crest supplies switch over to the new firm.
Farmers have been promised their current contracts would be safe after the merger.
Dairy Crest CEO Mark Allen said he remained confident of receiving approval at the end of phase two.
“We remain convinced that this is a great deal for customers and farmers which will help create a more sustainable UK dairy sector at a time when it faces significant challenges,” he said.
By Charlie Taverner