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UPDATE 2-UK watchdog flags price concerns in Stonegate/Ei pub deal

By Yadarisa Shabong

(Adds comments from Ei Group)

By Yadarisa Shabong

Dec 6 (Reuters) - Britain's competition watchdog has flagged concerns about potential price increases at some pubs from a merger of Slug and Lettuce pub owner Stonegate and rival Ei Group, which would create the country's biggest pub operator.

The Competition and Markets Authority (CMA) said on Friday Stonegate Pub Company's proposed purchase of Ei Group did not raise UK-wide competition concerns but could damage competition in 51 local areas.

"The CMA is therefore concerned that, if the businesses were to merge, pub goers in those areas could be faced with price increases or lower quality products and services."

The CMA said the merger would be cleared if the companies were able to overcome those local concerns.

In response, Ei said the two companies would make proposals to address the CMA's worries and said it was confident that these would satisfy the watchdog and help to avoid an in-depth investigation.

In July, Stonegate agreed to buy larger rival Ei for 1.27 billion pounds ($1.63 billion) to take control of about 4,000 additional pubs.

Stonegate, which is owned by private equity fund TDR, is best known for its Walkabout, Yates and Slug and Lettuce chains. Ei runs a disparate range of pubs, often in partnership with landlords and small operators, who tailor their menus and entertainment to cater to local customers.

The CMA, which investigated the potential impact of the merger in more than 500 local areas across the UK, said if the businesses were to merge, pub-goers in 51 areas might face higher prices and lower product quality.

British restaurant and pub operators have had to cope with lower consumer spending and higher expenses, most notably from wage inflation and property costs, following Britain's vote to leave the European Union.

The companies have until next Friday to suggest ways to overcome the CMA's concerns and if these are insufficient then the merger will be referred for an in-depth investigation, the watchdog said.

Ei continues to expect the merger to complete in the first quarter of next year. ($1 = 0.7794 pounds) (Reporting by Yadarisa Shabong in Bengaluru; editing by Uttaresh.V, Bernard Orr and Jane Merriman)