The competition watchdog has escalated its probe into Unilever’s $65bn deal to offload its food arm to American spice giant McCormick, warning it could “substantially” weaken competition in the UK grocery market.

In an update on Wednesday, the Competition and Markets Authority (CMA) said the mega-merger “gives rise to a realistic prospect of a substantial lessening of competition” within the condiment and spice market and called on the two companies to provide assurances over the deal.

“The CMA found that the merger will combine two of the largest brand suppliers… and the merged entity will be the largest supplier of dry ingredient mixes and dry sauces by far,” the watchdog wrote, adding it had “not seen any significant growth in the relevant product markets that would suggest new entry or expansion would be sufficient to constrain the merged entity”.

Unilever and New York-listed McCormick now have until 18 November to offer “undertakings which might be accepted” by the regulator to quash its concerns. These could include spinning off or selling brands where competition concerns are greatest.

CMA decision was ‘expected’ – Unilever

Consumer goods giant Unilever took many of its investors off-guard when it inked the $65bn (£48.8bn) deal to merge its food arm with Frank’s hot sauce owner McCormick in March. The FTSE 100 group, whose stable of brands includes Dove, Sure and Vaseline, had previously floated plans to spin off some or all of its food labels, until McCormick tabled a shock bid for the entirety of the underperforming division.

The tie-up will bring household-name brands like Unilever’s Hellman’s and McCormick’s Frank’s mustard under one roof, in what was one of the largest mergers in London Stock Exchange history.

Watchdog officials singled out the supply of dry ingredients and sauces as being especially concentrated in the newly formed entity, expected to operate under the name McCormick. The CMA found the merged company, which will combine the likes of McCormick’s Schwarz brand with Unilever’s Knorr, would be “the largest supply of dry ingredient mixes and dry sauces by far”.

“While private label and branded competitors (including Maggi in dry ingredient mixes and Bisto in dry sauces) exert some degree of competitive constraint, their products… impose only a limited constraint on the parties in dry ingredients and mixing sauces,” watchdog officials ruled.

The regulator also found “no realistic prospect of competition concerns” in the mustard market, despite the new company bringing the London-listed party’s Colman’s and Maille mustard brands together with Frank’s.

A Unilever spokesperson said the ruling was “an expected step in the regulatory process, and we are working constructively with the CMA on a suitable remedy” and that a sale process for Colman’s was already under way.

“As announced in August, a decision had already been taken to market the Colman’s brand and assets for sale to proactively address potential competition concerns,” they added. “Discussions with potential buyers are progressing well.

“We continue to make good progress on regulatory approvals globally, reinforcing our confidence in a timely closing.”

Both parties have cheered the megamerger as an important cog in their respective turnaround plans, as both battle to arrest a years-long spell of stagnating growth and languid share prices. McCormick sees it as a valuable means of adding economies of scale to its food juggernaut, which will be dual listed in London and New York, allowing it to find efficiencies.

Unilever has held it up as a flagship measure in its drive to focus on higher-margin, higher-growth divisions, like consumer healthcare and wellness.

Unilever shares traded flat on Thursday morning, while McCormick’s shares were down 2.4 per cent in out-of-hours trading.