Cider maker C&C defends bid for pub chain Spirit after profit drop

(Updates share price, CEO comments on Spirit bid)

By Conor Humphries

DUBLIN, Oct 29 (Reuters) - Irish cider maker C&C Group Plc (Other OTC: CCGGY - news) on Wednesday defended its bid to buy British pub chain Spirit, arguing it needs greater scale to battle competition in England, where profits dropped sharply.

An almost three percent dip in third-quarter profit, a lacklustre performance in its key markets and worries over its strategy after the bid helped send C&C shares down more than 7 percent to their lowest level in over two years.

C&C has lost 15 percent of its value since it said last week that it had made an approach for 1,200 pub chain Spirit, a deal it hopes would boost sales of its drinks brands, which include Magners cider and Tennent's lager. Analysts have questioned potential savings from a takeover, and the company's ability to manage the additional assets.

Chief Executive Stephen Glancey said the purchase of pubs by brewers had a long history of success in Britain, and argued his executives had experience in the market.

"The combination of cash flow coming from brand ownership and distribution has proved to be quite a powerful concept," Glancey said. Spirit is particularly attractive because of its exposure to London, he added.

Spirit, which has recommended a rival offer from Greene King (LSE: GNK.L - news) , has rebuffed C&C's approach. A source with knowledge of the deal said the C&C offer was slightly higher than the Greene King bid of 109.5p per share, valuing the chain at 723 million pounds. It also had a larger cash component, the source said.

C&C has until Nov. 20 to submit a firm, improved offer to secure the pub chain. Glancey declined to comment on whether the group could improve on Greene King's offer.

In the quarter, C&C reported a 2.7 percent drop in operating profit to 69.2 million euros, dented by a drop in the United States and tougher competition in Britain.

C&C said volumes in the U.S -- which accounted for just 0.7 million euros of profit -- were down 21 in the first six months, with operating profit 90 percent lower. Operating profit in England and Wales was down by 37 percent.

Glancey told analysts that C&C planned to stay in the U.S. market for the "long haul" and said it expected to return to meaningful growth in time.

C&C shares briefly fell to 3.29 euros at 0953 GMT, down 11 percent from the opening, but recovered to 3.46 euros by 1120.

"The fall seems to be due to a combination of factors: A sharp deterioration in the U.S. business, the fact that there is no guidance for the full year and a lot of uncertainty about strategic rational on the Spirit bid," said Merrion Capital analyst David Holohan.

C&C said it was not allowed to give full-year profit guidance under takeover rules.

Stockbroker Goodbody said it planned to cut its forecast for C&C's full year profit by around 7 percent.

(Reporting by Conor Humphries; Editing by David Holmes and Clara Ferreira Marques)