UK: Mega Milk Merger

Last Updated: 5 September 2012
Article by Susan Shaw

The announcement of a merger between Arla and Milk Link looks set to form the basis of a major reshaping of the UK dairy processing sector.

A merger between Arla and Milk Link would create the UK's largest dairy processing business (see table below). This follows the Müller takeover of Robert Wiseman earlier in the year, and creates a very different processing landscape for UK dairy farmers.

Over 99% of Milk Link's farmer members voted in favour of the merger. The deal must also be agreed by Arla's Danish parent company and both EU and UK regulatory authorities. Arla appears to be on the acquisition trail, also announcing a merger with Milch- Union Hocheifel (MUH), a large German dairy co-operative.

Milk Link members will become full members of the Arla co-op – with exactly the same rights and terms as farmers in Scandinavia and Germany. Members of the existing Arla UK supply group, the Arla Foods Milk Partnership (AFMP) are not part of the merger process and AFMP members will continue to sit outside the main Arla co-op. AFMP producers' milk price will be set separately from the co-op price and from 1 July 2012 Milk Link farmers received a higher milk price than non-aligned AFMP producers.

AFMP are unlikely to be happy to be overtaken by Milk Link farmers in the race to become full members of Arla. The argument is that Milk Link members have invested considerable sums in their co-op to get it to a point where it is an attractive takeover prospect. AFMP farmers have not put the same sums in. However, this merger may well accelerate moves to bring AFMP within the full co-op structure. The terms of the deal are somewhat complicated. Some of the main points are as follows.

  • Milk Link members got 1p per litre (ppl) added to their milk price from 1 July, to continue for three months.
  • From 1 October, a pricing formula based on either a discount to the Arla co-op price or a premium to a basket of prices from major UK milk buyers will apply.
  • Arla Milk Link members will become fully aligned with full Arla co-op members from 1 October 2016. They will then be eligible for the '13th payment' co-op bonus.
  • The Arla milk price is set in Danish krone. To remove some of the effects of currency fluctuations a smoothing mechanism based on a rolling two-year average will be used to convert to a sterling price for UK farmers.
  • A maximum of 5ppl of Milk Link members' capital will be rolled into Arla, with any excess being paid out.

The merger has been widely welcomed by the industry. It appears to have been a logical move for Arla – adding Milk Links considerable UK cheese business to Arla UK's spreads and liquid milk operations. It also provides Arla with far more clout in the marketplace, and perhaps a better negotiating position with the major retailers. Milk Link farmers who have stuck with the co-op for the last 12 years should end up with a better milk price. It is calculated that Arla members have received a milk price 10% higher on average than Milk Link producers over the past five years.

The UK farmers will get the benefits of being full members of a massive EUwide dairy business that is farmer-owned. The enlarged Arla will have over 12,000 members and process 12 billion litres per year in total – almost equivalent to the entire UK milk output. It appears a good outcome all round, but only time will tell. The next question is 'what happens now?' in terms of rationalisation. Dairy Crest has undertaken some restructuring, but looks to be the next candidate. There is a school of thought that to really reduce the power of the retailers the current 'big three' liquid processors needs to reduce to just two. This would require Dairy Crest's liquid business ending up with either Wiseman Müller or Arla.

Whether the competition authorities would allow this, and what would happen to Dairy Crest's other businesses, especially cheese, is uncertain. Also not at the party so far is the First Milk cooperative, who should not be forgotten. It seems unlikely that this story has played out yet.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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