UPDATE 2-Drinks firms AG Barr, Britvic aim to keep merger alive
* Firms don't think deal would substantially cut competition
* Say will work with Competition Commission
* Commission's investigation expected to take six months
* Shares in Britvic down 8 pct, A.G. Barr 3 pct
LONDON, Feb 14 (Reuters) - Soft drink firms Britvic and A.G. Barr will work together to show that their proposed merger will not reduce competition after the deal was referred to Britain's anti-trust watchdog.
The tie-up, agreed in November, would bring together Britvic's PepsiCo drinks plus Robinsons and Tango brands and Barr's Rubicon and Irn-Bru, the orange fizzy drink that out-sells Coca-Cola in Scotland.
But the all-share deal to create one of Europe's biggest drinks firms was referred by the Office of Fair Trading to the regulator on Wednesday due to competition concerns over certain brands.
Shares in Britvic were down 8.5 percent at 384 pence at 1156 GMT, with smaller rival Barr down 3 percent at 500.5 pence.
The two companies said on Thursday there was compelling rationale for clearance.
"A.G. Barr and Britvic believe that the merger will not result in a substantial lessening of competition and that they will be able to demonstrate this to the Competition Commission."
The OFT's referral centres on its concerns around a loss of competition between brands such as Britvic's Pepsi and Tango and Barr's Irn-Bru and Orangina.
But analysts believe this could be overcome.
"The competition concerns ... could be dealt with through the termination of licensing Orangina in the UK, and the sale of smaller non-core brands," Canaccord Genuity analyst Wayne Brown said.
"Orangina accounts for around 5 to 10 million pounds of sales for Barr, hardly a competitive stumbling block in a soft drinks market worth 9 billion," he said.
The Commission's investigation is expected to take six months. The companies said that if clearance were obtained they would reconsider the terms of the merger at that time.
The rationale for the deal is a greater buying power as an enlarged group, while Barr would benefit from Britvic's ties with big UK retailers, and Britvic from Barr's relationship with independent firms. The deal would also open up Britvic's international markets to Barr.
The combined group's UK market share would rise to 14 percent compared with Coca-Cola's 28 percent.
The competition referral marks another setback for Britvic which last year had to recall its Fruit Shoot children's drink over faulty caps. This hit sales and contributed to a 19 percent fall in group annual pretax profit.
Under the original merger agreement, approved by shareholders, the combined group - worth just under 1.6 billion pounds at current market value - was to be run by Barr chief executive Roger White and would have resulted in a 63 percent stake for Britvic shareholders with AG Barr investors holding the rest.
On Wednesday it appointed Simon Litherland as CEO with immediate effect. He replaces Paul Moody, who is retiring.
In November, Britvic posted a 5 percent rise in first quarter revenue and said it would step-up distribution of Fruit Shoot in the United States and Spain this year.
Barr said in December revenue for the 18 weeks to Dec. 1 had risen 9 percent.