Wiseman, one of the UK's top three dairy processors, said it would pay £5.5m cash to buy the Milk Link fresh milk division, consisting of the Milk Processors and Newlands Farm businesses.
The move, which follows Wiseman's acquisition of Definitely Devon's milk division, shows how cost pressures on the dairy industry have made consolidation a high priority.
Wiseman, which makes up 24 per cent of the UK's liquid milk supply, will use Milk Link to bolster its operations in the southwest of England, an area it has shown increasing interest in after years of focusing on milk supply in Scotland.
"This acquisition complements our plans to open a new £46m dairy in Bridgwater, Somerset in Autumn 2007, and will allow us to quickly grow our presence in this part of the country," said chief executive Robert Wiseman.
The deal will tag on an extra 32m litres of milk sales per year to Wiseman's 1.4bn-litre network.
Dairy officials have predicted for some time that low earnings across the dairy supply chain will make more consolidation necessary.
Soaring input costs and recent supermarket price cuts on milk have intensified the margin squeeze on Britain's dairy processors.
Wiseman was the only one of the 'big three' to record a profit rise in its recent full year results, although it failed to regain ground already lost in 2004. Rival processor Arla UK saw profits dive into the red for its first half, while Dairy Crest said profits were down by around 40 per cent.
Wiseman, however, faces a tense wait to see if the UK's Office of Fair Trading (OFT) asks the Competition Commission to investigate its deal with Milk Link.
Relations between the dairy industry and OFT have soured over the last six months, amid accusations the OFT has singled out dairy sector takeovers for criticism.
Jim Begg, head of industry association Dairy UK, told DairyReporter.com that many in the industry were incensed when the OFT requested a Competition Commission inquiry into Wiseman's proposed takeover of Scottish Milk Dairies. Wiseman subsequently dropped its bid.
"In terms of competition law, we all know the rules but the industry needs to have flexibility to consolidate," said Jim Begg, head of industry association Dairy UK, at the recent annual Guild of Agricultural Journalists' meeting.