New Zealand regulatory agency the Commerce Commission has received an application from dairy company Fonterra for clearance to acquire the shares in Kapiti Fine Foods Limited and United Milk Limited from Foodstuffs (Wellington) Co-operative Society Limited.

Foodstuffs is a co-operative society specialising in grocery distribution in the lower North Island, the commission said. Foodstuffs operates a part of its business through its wholly owned subsidiaries Kapiti and United Milk. Kapiti manufactures and processes dairy products, particularly specialty cheeses, premium ice cream and town milk, and operates a raw milk processing facility in Palmerston North, from which it supplies Kapiti's Farmgate and Kapiti branded milk, as well as Pam's and Calci-smart milk for Foodstuffs' lower North Island stores.

In considering the application, the Commission's role is to determine whether the acquisition has the effect of substantially lessening competition in a market.

In its submission Fonterra points out that the Dairy Industry Restructuring Act of 2001 requires it to provide up to 400 million litres of raw milk to competing processors at wholesale prices every season. The act "virtually eliminates barriers to entry within New Zealand," it said.

Selling Kapiti and UML is part of Foodstuffs broader strategy to compete with Woolworths Australia in New Zealand, it said. That strategy involves developing key long term relationships with existing suppliers, rather than vertical integration.