Express Dairies' merger with Arla turns sour on monopolies referral

Express Dairies suffered a setback yesterday when its proposed merger with the UK arm of the Danish co-operative Arla Foods was referred to the Competition Commission. The decision will delay the £140m merger by about three months as the commission is not to report until 24 September.

In making the referral, the Competition minister, Gerry Sutcliffe, said: "The OFT [Office of Fair Trading] has advised me that this proposed acquisition gives rise to a significant prospect of a substantial lessening of competition. It would lead to a reduction in the number of potential suppliers of fresh milk to the larger supermarkets from four to three nationally and potentially from three to two in some regions."

He added that the decision did not prejudge whether the deal was against the public interest. However, Express Dairies' shares closed 2.75p lower at 36.75p.

Some analysts expressed surprise at the decision given the overcapacity in the milk market and the need for rationalisation. However, the battle for control for Safeway, where four of the bidders have been referred to the Competition Commission, was viewed as a potential factor by some experts.

One analyst said: "I think the Safeway situation is an issue. If they are looking at the supermarket sector going from four to three then they have to look at the suppliers going from four to three too. They have to be consistent. But we are still pretty confident that it will be waived through."

Express Dairies said it intended to "co-operate fully with the Competition Commission to work towards a successful outcome".

The merger would create the UK's largest milk supplier to supermarkets, with 38 per cent of the market. The only other two players would be Robert Wiseman, which is dominant in Scotland, and Dairy Crest. The business would have combined sales of £1.3bn and be renamed Arla Foods.

The combined Express Dairies-Arla business would account for 44 per cent of Tesco's milk supply and 70 per cent of Somerfield's.

Another factor in the decision to refer the deal may have been the relatively limited time the OFT had to consider it. The merger only came back under the OFT's jurisdiction a month ago after the European Commission said the deal raised no Europe-wide issues.

The delay to the merger will mean that Express shareholders will have to wait for the 9.6p special dividend promised. It will also mean a delay to the synergy benefits, worth £20m over three years.

Last month Express Dairies reported profits of £12m for the year to March, with the doorstep delivery business seeing a volume decline of 10 per cent year on year. This is better than the 11.5 per cent suffered by the market as a whole.

Express has been keen to seal the Arla deal as it will give it greater economies of scale.