The UK competition probe into the proposed sale of Dairy Crest's milk business to Müller has been extended to a so-called "phase two" investigation.
The Competition and Markets Authority said on Friday afternoon it has decided to start a detailed inquiry into the deal, which was announced in November.
The regulator said the findings from its "phase one" investigation suggested the proposed merger "gives rise to a realistic prospect of a substantial lessening of competition in the supply of fresh milk to major grocery retailers with national scope".
Dairy Crest and Muller have insisted the merger is necessary in order to create a sustainable UK milk sector. The companies say economies of scale will help the profitability in liquid milk.
"The CMA is aware of the very significant challenges the UK dairy sector is currently facing. These challenges are recognised in the framework which we used to assess the merger. However, the CMA found that the transaction may nevertheless give rise to competition concerns, since it removes the rivalry between the two main suppliers of fresh milk to major grocery retailers in certain parts of Great Britain," Sheldon Mills, senior director of mergers at the regulator, said.
Responding to the news, the dairies said the development was "expected" and said that the deal remains "on track".
Ronald Kers, chief executive of Müller, said: "It was our expectation that the CMA might wish to examine our proposed acquisition in detail and we look forward to working with them to supply the information required and to achieving a positive outcome.
"The rationale for this transaction is perhaps even stronger now given the mounting challenges facing the UK fresh milk sector and we remain convinced of the need to increase our competitiveness, ensuring that customers continue to receive a quality product at a low price, whilst continuing to pay farmers fairly."
Dairy Crest CEO Mark Allen echoed the sentiment. "We remain convinced that this is a great deal for our customers and farmers which will help create a more sustainable UK dairy sector at a time when it faces significant challenges. We remain confident of receiving approval at the end of phase two."
Analysts at Shore Capital were also upbeat on the likelihood a deal will ultimately progress if the companies take some steps to remedy concerns about the competitive environment in some regions of the UK following the deal. "The issues seem modest, which should make for grounds for cautious optimism that a satisfactory outcome can be found either in the near-term or through a full phase two investigation."