Dairy Crest said it would buy Arla UK's Express Dairies division for £33m, creating the UK's largest milk delivery service to homes, public buildings and small shops.
The deal represents significant consolidation on Britain's 'doorstep milk' delivery market, reflecting declining demand from consumers.
Rising sales of cheaper supermarket milk have rendered Britain's army of morning 'milk floats' an endangered species in recent years.
"The home delivery sector's share of the liquid milk market in England and Wales has reduced dramatically since 2000, from 25 per cent to 11 per cent," said Tim Smith, chief executive of Arla Foods UK.
Arla seemed happy to have dumped a troublesome sideline business.
The firm said Express Dairies, with its 77 distribution depots, had outperformed the shrinking market, yet profits were still expected to fall in the current financial year, ending 30 September.
"In order for this sector to have a viable future, further consolidation of the industry was required," said Smith.
Arla, which saw profits drop into the red for its first half this year, said selling Express Dairies meant it could focus 100 per cent on brands and added value products.
Many in the UK dairy industry see these products as the key to a competitive future for the sector.
Dairy Crest has also worked hard to target added value product trends with launches such as St Ivel Advance milk enriched with omega-3 fatty acids.
The group was, however, confident it could make an efficient, profitable business in the home delivery sector out of its deal to buy Express Dairies.
It said it expected the acquisition to save it £2m this year, £8m next year and around £9m in 2008/2009.
The group accepted Express Dairies' profit problems, but added: "Dairy Crest has the industry-leading business model for doorstep and middle ground, which has delivered good profits and cash in recent years."
Those involved in the UK dairy industry, including the National Farmers' Union and trade association Dairy UK, have repeatedly said more consolidation would be necessary to raise earnings and relieve cost pressures in the sector.