Müller has offered to supply and process up to 100m litres of fresh milk a year for a third party at the Severnside dairy in Gloucestershire to facilitate its acquisition of Dairy Crest’s liquid milk business.

A “notice to consider undertakings” offered by Müller – published by the Competition and Markets Authority (CMA) – revealed that the dairy giant was offering up to a fifth of the processing capacity of the Dairy Crest-owned site to a competitor processor in order to allow it to tender for supermarket supply contracts in the South West of England and South Wales.

The so-called ‘toll processing’ agreement would have an initial duration of five years (extendable by an additional three years to fulfil any supermarket contracts) and would allow the as-yet unidentified competitor to use its own supply of milk or to use Müller’s.

Müller will then handle all distribution for the milk produced.

The proposal follows a demand by the CMA for the processor to offer “acceptable undertakings” to ensure the £80m acquisition of the Dairy Crest business did not create a “a substantial lessening of competition” in the region post-deal.

The sum paid by the third party to Müller consists of an upfront payment determined by an auction process, according to the proposals, and “per litre component price” based on variable processing costs.

Müller would also put arrangements in place to protect against “dissemination of commercially sensitive information throughout the parties’ businesses”, added the CMA notice.

These arrangements include the separation of Müller personnel dealing with negotiations with the third party from Müller personnel dealing with supermarket contract bids “in order to ensure the ring-fencing of information relating to the cost considerations of fresh milk volumes processed under the toll processing agreement”.

The CMA’s senior director of mergers Sheldon Mills, said the regulator considered Müller’s proposals “might be acceptable as a suitable remedy, given that it may enable a third party dairy processor to compete to supply national multiples in the Severnside catchment area”.

He added that the CMA’s decision would be informed by, among other things, third party views (including the supermarkets, dairy processors and any other relevant stakeholders) and whether the undertakings were “suitable to address competition concerns”.

In particular, he warned, “before ultimately accepting the proposed undertaking, the CMA must be confident that the nominated purchaser is an effective and credible supplier to national multiples such that the competitive constraint provided by Dairy Crest is replaced to a sufficient extent”.

The CMA is expected to further report on the deal’s progress on 21 August.