BURLINGTON, Vt. (AP) – HP Hood Inc. has abandoned plans to merge with the nation’s second largest dairy company, officials said.

Instead, Hood of Chelsea, Mass., will enter into a scaled-down deal with Dallas-based National Dairy Holdings and the Dairy Farmers of America. DFA is a national farm cooperative and half-owner of NDH.

The original proposal would have given DFA a hand in 90 percent of the milk that flows to processors in New England.

That level of market control drew the interest of federal and state antitrust investigators.

After the Hood merger proposal was announced last fall, the Vermont Attorney General’s office began an antitrust investigation. Ten U.S. senators including Vermont’s Patrick Leahy and James Jeffords, and five congressmen, asked the U.S. Justice Department to investigate.

Leahy and Vermont Rep. Bernard Sanders, an independent, said they would look carefully at the new proposal.

“Even Hood apparently acknowledges that a merger raises concerns,” Leahy said in a statement.

“The proposed merger of Hood and National Dairy Holdings would have been a disaster for Vermont farmers,” Sanders said. “We are going to carefully examine the details of the new proposed relationship between Hood and National Dairy Holdings. If it is also going to lead to an unhealthy consolidation in the dairy industry in New England I will oppose it just as vigorously as I did the former horrendous merger plan.”

Under the new proposal Hood would own 30 percent of NDH; DFA would own 15 percent of Hood.

Portions of the original proposal remains intact, including top executives who will share the leadership of Hood and NDH.

The biggest sticking point for some – DFA’s exclusive rights to supply all of Hood’s milk, forcing most Vermont farmers to go through a competitor to sell their milk – is no longer in the proposal.

Hood spokeswoman Lynne Bohan said the merger failed because of “significant financial complexities.”

“This is a clean, more straightforward transaction, and allows us to have the relationship with Hood where we can blend our product distribution capabilities but still remain separate companies,” said Fred Stern, NDH spokesman.

Founded in 1846, Hood owns 15 percent of the New England milk market and has wanted to expand nationally. National Dairy Holdings, started in 2001, is number two in the national milk market, with 33 plants in 17 states, but has only a sliver of the New England market.

AP-ES-05-13-03 1302EDT