Europe’s dairy sector saw yet another piece of consolidation last week with news two major French co-ops, Sodiaal and 3A, were to merge.

The deal, which awaits regulatory approval and backing from both co-ops, it will be the latest to be made in Europe’s dairy industry, which is preparing for the end of EU dairy quotas in 2015.

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It is the latest transaction to be pursued ahead of the planned scrapping of quotas, which will allow producers to up output with a view to serving growing demand for dairy products in the world’s emerging markets.

A merger of Sodiaal and 3A is not of the scale of some of the previous pieces of consolidation in the sector (think of the deal, for instance, that created FrieslandCampina in 2008) but it shares a common factor – the desire to build scale to better serve markets where demand for dairy products is rising, like China, when the quota shackles are removed in two years’ time.

Dairy consumption is stagnant in Europe and the region’s processors are looking to markets like Asia for growth. However, competition to serve countries like China is fierce and processors have realised they have to build scale to compete. The deal with 3A will add to Sodiaal’s resources to serve markets further afield. Sodiaal already has its eye on China; through a partnership with Chinese infant formula firm Synutra, the French group has set up two production plants in Brittany.

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Dairy consultant Mark Voorbergen says the “big, long-term opportunities” for European dairy processors are outside the region. “If you are looking for growth there is very little you can do on the European market.”

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While the giants of Europe’s dairy sector, including Sodiaal, have already made strides into markets like Asia, this kind of deal also provides medium-sized firms an opportunity to tap into the growth in regions like Asia, especially for 3A, which is joining forces with a company that already has experience of dealing in China.

Voorbergen says the transaction should particularly benefit 3A’s farmer-members. “I don’t think a company like 3A, like most mid-sized co-ops have the critical mass to do that on their own. You need critical mass to share the R&D budget and capex you may need among as large as possible group of farmers. If 3A wants to tap into some of these opp they need to be part of a bigger group.”

3A posted a turnover of EUR756m in 2012 and the deal, should it go through, will take Sodiaal’s annual revenues to more than EUR5bn (US$4.6bn). “For Sodiaal, it will help them as well to move their business forward at a higher pace,” Voorbergen says.

The deal may also bolster Sodiaal’s domestic dairy business. The liquid milk sector in France, in common with many markets in the West, is challenging and Sodiaal is already looking to make some cuts to its Candia business next year. Sodiaal has also emphasised the upmarket AOC cheeses in the 3A portfolio, which also includes patisserie products through its Boncolac arm.

However, the stronger rationale for the merger is to build scale to serve markets outside France. “If the portfolio contains a couple of cash cows it is always a benefit but I can’t imagine that to be the main trigger of this initiative,” Voorbergen says. “It’s really about building critical mass to speed up the access to the global market, to build your R&D budget and invest in the assets you need to tailor your products to international buyers.”

Kevin Bellamy, senior dairy analyst at Rabobank International, sees another benefit to the deal for Sodiaal; joining forces with 3A, based in the south west of France, gives the Candia owner national representation in France.

“I think the geography of the membership is also key. Previously the membership appeared quite polarised between the traditional in the east and the fast growth of the west, the new members may add a further facet and make debate within the co-operative balanced.”

Nevertheless, the deal adds to a number of “challenges” facing Sodiaal, Voorbergen believes. Its Entremont Alliance business, acquired in 2010, is located in the north-east of France, where milk production may grow fastest after the end of quotas. “That’s new milk that needs new markets, which is a challenge in itself,” Voorbergen. “There is the old the Entremont cheese business that needs to be integrated and needs to be made profitable. Then the start they have made with Synutra is only a start. It gives them access for their milk into the Chinese market but there is still a lot more value that can be captured. Then there is the integration of the 3A business. They are on the right track but let’s say the management’s plate is pretty full.”