The UK'S largest milk producer, Express Dairies, is considering a takeover approach from the Scandinavian farmers' co-operative which makes Lurpak butter.
The move from Arla Foods, which would create Britain's largest dairy business, comes after calls from Express's chairman, Lord Haskins, for further consolidation in an industry plagued by overcapacity.
Arla is understood to have hired Lehman Brothers, the US investment bank, to prepare an offer for Express, which sources have indicated could value the British milk group at up to £100m. Arla already owns six dairies in the UK and is the number three milk producer in the country.
Express, which is Britain's largest with 30 per cent of the market, has struggled to prosper since it was spun off from Northern Foods in 1998. The company's stock market value has collapsed over the last 12 months to 14.5p, valuing the group at £43m. It was worth just under £500m when it floated.
A takeover by Arla, which was itself the creation of a merger in 2000 between MD Foods from Denmark and Arla Foods of Sweden, is expected to be welcomed by Britain's farmers because the Scandinavian group has long enjoyed healthy relationships with dairy producers.
Arla, Europe's largest dairy company, produces more than 7 billion litres of milk and has a turnover in excess of €5bn (£3.1bn) a year. More than 15,000 Swedish and Danish milk producers have a share in the group. In the UK its sales top £400m a year, from a dairy product range which also includes yoghurts, creams and cheeses.
A firm offer could trigger a counter-bid from Robert Wiseman Dairies, the Scottish milk group, which held abortive merger talks with Express last year.
In the past two years Express has launched attempts to reduce its dependency on doorstep deliveries, by using its milk floats to deliver a range of goods from dry cleaning to parcels. These have failed to prevent the company from falling into losses.
Home milk-delivery volumes are sliding by up to 16 per cent a year and a Government task force has predicted that by 2010 only 12 per cent of UK homes will have their milk delivered. In 1980 that figure was nearly 90 per cent.
Intense competition, compounded by excess capacity, has squeezed margins on milk sold to supermarkets.Reuse content