Australian Competition and Consumer Commission (ACCC) has received undertakings from National Foods and its partner Warrnambool Cheese and Butter Factory Company Holdings Ltd (WCB) that they will run Dairy Farmers' cheese business as a joint venture and operate their own cheese businesses separately.
National Foods is controlled by Japanese brewing giant Kerin.
The ACCC is also seeking comments on the competing takeover bid for Dairy Farmers by Italian dairy giant Parmalat and the Victorian-based Murray Goulburn Co-operative.
ACCC chairman Graeme Samuel said the commission was satisfied that the proposed acquisition by National Foods of Diary Farmers, which was subject to the court enforceable undertakings and would be unlikely to substantially lessen competition.
Dairy Farmers, Australia's biggest dairy cooperative, said in March that a formal sale process was under way.
Three dairy players have emerged, including National Foods, Parmalat and New Zealand based Fonterra, the world's biggest dairy producer.
Parmalat and Fonterra are still seeking ACCC clearance.
The price of milk and dairy products have surged in recent years because of growing demand from developing nations such as China and India.
WCB, Australia's oldest and only listed dairy company produces cheddar cheese for wholesale customers and exports 40 per cent of its output to Japan, Korea, United States and Europe.
The ACCC said on Thursday that it would accept submissions on Parmalat's merger proposal with Dairy Farmers by August 7 and has delayed its final decision on the proposed transaction until August 21.
A decision had been due on Thursday.
Parmalat and Murray Goulburn are proposing to split the NSW-based cooperative Dairy Farmers in two.
One company, to be called Fresh Dairy Co, would merge the fresh milk operation of Dairy Farmers, Parmalat and Murray Goulburn - controlling an estimated 50 per cent or more of the nation's branded fresh white milk sales.
Under the proposal, Parmalat would own 51 per cent of Fresh Dairy Co and have operational control while Murray Goulburn would hold 49 per cent.
The second company would produce non-fresh dairy products such as cheese, UHT milk and milk powder, and Murray Goulburn would own those operations.
Parmalat operates the Pauls brands of fresh milk in Victoria, Queensland, northern NSW, South Australia and the Northern Territory.
Murray Goulburn, which processes more than 35 per cent of Australia's milk supply, operates the Devondale and Kiewa labels in Victoria and NSW.
