Dairy Crest’s sale of its loss-making milk operation will be the subject of a competition review that will take potential completion of the deal well into the second half of this year.
The UK company announced in November it would sell its dairies business to German rival Müller for £80m to focus on profitable cheese and spreads.
The European commission has now referred the deal back to the UK Competition and Markets Authority, which usually takes many months to investigate an industry before ruling on whether a merger reduces competition.
The sale would leave the UK milk market dominated by three big suppliers – Müller, Denmark’s Arla, which is the biggest producer, and the First Milk farmers’ cooperative.
Analysts said when the deal was announced that combining Dairy Crest’s business and Müller would create a stronger competitor for Arla, which produces about 3.5bn litres of milk compared with 1.3bn for Dairy Crest.
“We see this proposed deal as an important and good one, not just for Dairy Crest but also the whole dairy farming and processing industries in Great Britain. Put another way, if it did not go through we would be concerned about the ongoing stability of the liquid milk industry and the farmers that supply it,” said analysts at Shore Capital.
When it announced the deal, Dairy Crest said its business was not viable on its own because of fierce pressure to cut prices. UK farmers are already paid some of the lowest prices in Europe for their milk – a situation compounded by supermarkets selling cheap milk to attract customers.
Mark Allen, chief executive of Dairy Crest, said he believed the deal remained on track for completion despite the regulator’s involvement.
“This transaction will be a positive development for both Dairy Crest and the UK dairy industry as a whole, delivering economies of scale that will help to create a more sustainable UK dairy sector that is better placed to compete on the global stage. It has always been our preference for the transaction to be reviewed in the UK, so we welcome this referral back to the CMA as a positive step.”
Dairy Crest has been losing customers to supermarkets, which offer cheaper milk than its door-to-door delivery service.
Profits at Dairy Crest plunged to £900,000 from £19.7m in the first half of the year, with a loss at its dairies business. It blamed “extremely volatile” markets, with cream prices down 40% from their peak and both cream and skimmed milk powder prices falling sharply.