Dairy Crest to unload milk business, focus on cheese

* Agrees to sell dairies business for 80 mln stg

* Müller UK & Ireland Group to buy milk and bottling plants

* Dairies business made first-half loss

* Dairy Crest (LSE: DCG.L - news) shares rise 13 pct (Adds details, analyst comment; updates share price)

By Aastha Agnihotri

Nov 6 (Reuters) - Dairy Crest Group Plc agreed to sell its loss-making milk business to a unit of German food group Müller in order to cut its debt and focus on processed cheese and spreads.

Shares (Berlin: DI6.BE - news) of Dairy Crest, which makes Cathedral City cheese and Country Life butter, rose 13 percent on Thursday to rank among the top gainers on the London Stock Exchange (Other OTC: LDNXF - news) .

Dairy Crest said it would sell its dairies operations - one of the company's three business units - to Müller UK & Ireland Group for 80 million pounds ($128 million).

Among the assets to be sold are a bottling plant and three milk and cream factories, including the plant in western England that makes the popular fresh milk drink FRijj.

"Dairy Crest's dairy business has always been the 'poor relative' in the group, diluting margins and the quality of earnings," Investec (LSE: INVP.L - news) analyst Nicola Mallard wrote in a note.

Dairy Crest has struggled to pass on higher raw milk prices it paid to farmers last year and has been losing customers to supermarket chains, which offer cheaper milk than the company's door-to-door delivery service.

Though the dairies business accounted for slightly more than two-thirds of revenue for the year ended March 31, it delivered only a quarter of the company's profit.

The unit swung to a loss of 4.4 million pounds for the six months ended Sept. 30 from a profit of 2.6 million pounds a year earlier.

Esher, Surrey-based Dairy Crest has been trying to increase profits by cutting distribution costs, improving its branding and selling property for which it has no need.

The sale, subject to clearance from competition authorities, will allow Dairy Crest to focus on its profitable cheese and spreads businesses. The cheese unit includes whey-based products used in infant formula, an area of investment for the company.

"The deal will reduce net debt and unshackle the high-quality foods business from a resource drain," analysts at Jefferies wrote in a note.

Dairy Crest's net debt increased by nearly half during the first six months of the financial year to end September at 209.6 million pounds.

Dairy Crest will sell its milk-processing factories at Foston, Chadwell Heath and Severnside, as well as the Hanworth glass-bottling plant and 72 depots.

Müller UK & Ireland Group said it would acquire Dairy Crest (BSE: CREST.BO - news) 's fresh liquid milk, flavoured milk, bulk and potted cream, bulk butter and milk powder businesses. (http://bit.ly/1tfLyif)

Müller Wiseman Dairies, known for its distinctive black-and-white cow-print branding, processes and delivers around 30 percent of the fresh milk consumed in Britain, according to its website.

Dairy Crest's shares were up 12.8 percent at 481.00 pence at 1254 GMT on Thursday. As of Wednesday's close, the stock had lost 21 percent since the beginning of the year. (1 US dollar = 0.6272 British pound) (Additional reporting by Roshni Menon in Bangalore; Editing by Gopakumar Warrier and Robin Paxton)