DX investor criticises reverse takeover plan for Menzies' distribution arm

* DX reverse takeover proposal offers 60 mln stg cash, new shares

* Menzies' answers investor call to separate distribution, aviation units

* DX investor criticises proposal, Menzies investor supports it

* DX shares suspended, Menzies shares rise 11 pct (Adds comments from DX shareholder, details, updates share move)

By Esha Vaish and Maiya Keidan

March 31 (Reuters) - John Menzies (LSE: MNZS.L - news) said it was in talks to sell its distribution arm in a reverse takeover deal with UK mail (LSE: UKM.L - news) delivery firm DX Group, which DX's top shareholder said was a "bad" proposal.

DX Group warned on profit last month citing challenges in the courier market and margin pressure in its freight unit, and activist investor Gatemore Capital Management argued a reverse takeover of Menzies would inflate debt without fixing DX's issues.

Firms are vying for size in UK's overcrowded and competitive parcels market, where DHL-owner Deutsche Post (IOB: 0H3Q.IL - news) has bulked up by buying UK Mail and Amazon has started its own deliveries.

DX forecast cost synergies of 8 million-12 million pounds each year from the Menzies deal, but Gatemore, which has an 11 percent stake in DX, said its failure to deliver against its 2012 Neightfreight acquisition left it sceptical.

"This is trying to tack on a complementary business. What DX needs to do is improve its service quality and operations," Gatemore Chief Investment Officer Liad Meidar told Reuters.

"It seems like an egregious case of the board... force-feeding a deal which is not in the best interest of shareholders... I think there are other(s) who will view this as we do."

Under the proposal, DX would pay about 60 million pounds ($75 million) cash and issue new shares to Menzies equalling 80 percent of DX's share capital, the companies said, without disclosing the deal value.

A firm offer would require support from shareholders holding at least 75 percent of DX's issued share capital as per UK takeover rules.

DX's shares, which have lost about 90 percent since it listed, were suspended from trading on London's Alternative Investment Market on Friday.

Menzies' shares climbed 11 percent to 706 pence. Three of its top investors had called for the separation of its aviation and distribution units, following warnings over profit and revenue and executive departures.

Executive Director John Geddes said the deal would boost its distribution unit's e-commerce delivery presence.

"We felt this was a step change for the business overnight and creates a very strong, truly national logistics player," he said.

If the deal closes, Menzies' distribution managing director Greg Michael will become DX chief executive and distribution finance director Paul McCourt will become DX chief financial officer.

Shareholder Value Management (SVM), which was one of Menzies' investors pushing for a business split after taking a 7 percent stake last year, told Reuters it was happy with the structure of the deal.

SVM had already pressured Menzies into hiring packaging industry tycoon Dermot Smurfit as its new chairman.

"Dermot's actions as chairman over his short tenure have been exemplary," SVM Director Gianluca Ferrari said, describing the plan as an "important milestone" for Menzies. ($1 = 0.8021 pounds) (Reporting by Esha Vaish and Rahul B in Bengaluru, Maiya Keidan in London; Editing by Amrutha Gayathri and Elaine Hardcastle)