Crisis hit Co-op set to unveil loss of up to 2.5 billion pounds

LONDON, April 17 (Reuters) - Britain's Co-operative Group will report a loss of more than 2 billion pounds on Thursday, laying bare the full damage done by disastrous acquisitions, a drugs scandal and an exodus of executives that have put its future as a mutual into doubt.

Losses at the group, whose activities range from supermarkets to funeral services, are expected to be up to 2.5 billion pounds ($4.2 billion) for 2013, according to a source close to the matter.

The crisis at the 170-year-old Co-op, which claimed its ethical credentials set it apart from commercial rivals, started at its bank with an ill-fated takeover of Britannia building society, which saddled it with a portfolio of souring property loans.

The bank, facing a 1.5 billion pound capital shortfall, was restructured last December, with bondholders including U.S. hedge funds taking control and the group's stake falling to 30 percent.

Co-op Group still owes Co-op Bank 263 million pounds from its initial 1.5 billion pound recapitalisation and is considering whether to inject more cash as part of a further 400 million pound fundraising by the bank to cover the cost of past misconduct such as overcharging for mortgages.

That decision is likely to depend on whether it can raise funds to do so. The group said in February it would sell its farms business and was considering a sale of its pharmacy chain.

Bankers say the pharmacy business could fetch between 450 million and 500 million pounds while the farms could be worth at least 150 million pounds.

Co-op's image has been tarnished by former Co-op Bank Chairman Paul Flowers being charged over possessing drugs. The former Methodist minister is due to appear before magistrates next month.

The financial problems at the wider Co-op Group, a major lender to Britain's opposition Labour party, have been compounded by a reduction in the value of stores it acquired in a 1.6 billion pound deal in 2009 to take over the Somerfield grocery chain.

Former chief executive Euan Sutherland and senior independent director Paul Myners have led efforts to reform and modernise the customer-owned group and bring a commercial focus to decision making.

But fierce resistance to change from some members of the group's board, which is elected from regional and local co-operative societies, resulted in both of them quitting.

Myners, who will depart in May, warned in March that the Co-op faced extinction unless it reformed to become more commercially driven.

Sutherland quit in March, after just 10 months in the job, saying it was impossible to reform the group unless its directors adopted a more commercial approach.

Myners, a former government minister, has urged the group to create a smaller board with the skills to hold executives to account.

Co-op's board is made up of members from its regional boards and independent Co-operative societies and is entirely non-executive, meaning no director is involved in the group's day-to-day operations.

Co-op members will vote on Myners' planned reforms at the group's annual general meeting on May 17 but he has warned the chance of his proposals being adopted is "quite low".

Following Sutherland's departure, Richard Pennycook, who joined the group as finance director last June, became acting chief executive.

Pennycook was finance director of the supermarket group and played a key role in turning that business around after it acquired rival Safeway (NYSE: SWY - news) in 2004.

($1 = 0.5977 British Pounds) (Reporting by Matt Scuffham and Paul Sandle; Editing by Anthony Barker)