Dairy Crest is to merge with Unigate's dairy and cheese activities.

Although there was no immediate news of job losses, the two firms say the merger should lead to annual savings of £25m by 2003.

Unigate's dairy division has 4,400 employees, and delivers milk to more than 1.3 million homes in the UK. Its turnover last year was £529m.

Dairy Crest, the UK's largest supplier of stilton cheese, will own 60% of the enlarged group, with Unigate holding 40%.

The deal will bring together Dairy Crest's Clover spread, Cathedral City cheddar and Frijj products and Unigate Dairies and St. Ivel Provisions (Cheese,Butter and Powder). Unigate's Utterly Butterly and Gold spreads are not included in the merger, and are retained by Unigate in the Convenience Foods business.

Jobs under threat

The deal will raise concerns about job losses among Dairy Crest's 3,800 UK staff and Unigate's 5,400 employees, as the two groups strive to cut costs from the deal.

John Houliston, chief executive of Dairy Crest said: "There will be some job losses, but the consolidation that people have been demanding will undoubtedly protect jobs in the long term."

Mr Houliston would not put a figure on potential job cuts but said the groups would seek cost savings in the merged milk, unbranded cheese and ingredients operations.

The liquid milk and unbranded dairy product market has hit tough times, with price pressures making trading conditions difficult.

Unigate last year said its dairy division had taken a knock, reporting a fall in profits at the dairy arm for the half-year.

It said it hoped that the merger would enable increased focus on the development of its position as one of the leading convenience food groups in Europe.

Market leading hope

"Our shareholders ... will benefit from the significant synergies available to the enlarged Dairy Crest and from the benefits to Unigate of concentrating its strategy of achieving leadership in the European convenience food sector," said chairman Ian Martin.

Dairy Crest was spun off from the UK's milk marketing board and floated in 1996. It aims to become the leader in the UK market for general dairy products, which it hopes will offset the trend of declining liquid milk prices.

The company currently has about 11% of the UK milk market and is the fourth largest milk producer in an increasingly competitive industry.