Express Dairies and the UK arm of Arla Foods are to merge with the enlarged group to be called Arla Foods UK.

Arla is the fourth largest liquid milk supplier in the UK and distributes products such as Lurpak and Anchor butter through its joint venture with global dairy group Fonterra.

Group MD of Arla Foods Jens Bigum said: “In the UK dairy industry we support the view that further rationalisation is needed in order to meet a challenging future and preferably with dairy farmers and processors getting closer.”

Arla UK expects to generate profits before interest, tax and exceptional items for the year to March 31 of not less than £22m.

The enlarged group will process approximately 2.4 billion litres of raw milk per annum.

Chairman of Express Dairies Sir David Naish said: “Our proposed merger with the UK subsidiary of Europe's largest dairy co-operative will combine two businesses with complementary operations and philosophies.

“Together we will form a substantially stronger group with a broad product portfolio, strong brands and the necessary management and financial resources to develop our operations for the future benefit of all our stakeholders, including shareholders, milk producers, employees, customers and consumers."