UPDATE 3-UK's Co-op laments worst year after 2.5 bln pound loss
* Loss includes bank recapitalisation, Somerfield charge
* Acting CEO says 2013 a disastrous year
* More than 100 offers for pharmacy, farms businesses
* CEO says lending banks are supportive
* Group undecided over whether to inject more cash in bank (Adds comments from CEO)
By Matt Scuffham and Paul Sandle
LONDON, April 17 (Reuters) - Britain's Co-operative Group made a loss of 2.5 billion pounds ($4.2 billion) in 2013, capping the worst 12 months in the mutual's 150-year history and ramming home the need for radical reform if it is to survive.
Co-op, hit by a yawning funding gap at its bank, a drugs scandal and an exodus of top executives, said on Thursday the results were a wake-up call to the serious challenges it faced.
"2013 was a disastrous year for The Co-operative Group, the worst in our 150-year history," Interim Chief Executive Richard Pennycook said of the supermarkets-to-funeral-services owner.
"Today's results demonstrate that but they also highlight fundamental failings in management and governance at the group over many years."
Co-op said 2.1 billion pounds of the total loss stemmed from its bank, which needed an emergency 1.5 billion pound recapitalisation last year that resulted in the group ceding control of the lender.
It also took a 226 million pound writedown on the value of stores it acquired in a 1.6 billion pound deal in 2009 to take over the Somerfield grocery chain.
The numbers lay bare failures of management at the group, whose main board is elected from regional and local co-operative organisations and which includes a nurse, a farmer, and a retired telecom engineer.
The group's reputation was further tarnished by a drugs scandal involving the former chairman of the bank, Paul Flowers. Flowers, who was a Methodist minister, was charged with possession of drugs on Wednesday.
Flowers apologized last year for doing things he said were "stupid and wrong" and said he was seeking professional help.
Efforts to reform the Co-op, a major donor to Britain's opposition Labour party, had been led by former chief executive Euan Sutherland and senior independent director Paul Myners. But both quit in the face of resistance to their drive to modernise the customer-owned group and bring a commercial focus to decision making.
Pennycook told reporters on Thursday that the Co-op's future was not under threat, saying it retained the support of its lending banks, which include Barclays, Royal Bank of Scotland and Lloyds Banking Group.
"This is an organisation that is not in breach of its banking covenants, is servicing its debt and has concrete plans supported by its banks to bring its debt down," he said.
Pennycook, who has been handed a pay package worth over 2 million pounds, said he would lead the group through reforms, and the search for a new chief executive would not start until those reforms were complete.
He said he would be "amazed" if an independent review did not conclude there had been failures of governance. He said there was not enough transparency, and the board was not fully aware of the extent of the mutual's problems.
The Co-op's members will vote on reforms put forward by Myners at its AGM on May 17, including the creation of a new board elected by members that is qualified to lead an organisation with the size and complexity of the Co-op.
The group said it was still considering whether to inject more cash into the Co-operative Bank, which needs an extra 400 million pounds to cover the cost of past misconduct.
The group saw its stake in the bank fall to 30 percent last year following a capital raising, with bondholders including U.S. hedge funds taking control. It would need to inject another 120 million pound to retain that stake.
Banking industry sources said its decision may come down to whether it can afford to do so and that could depend on whether it can raise funds by selling assets.
Pennycook told reporters that the bank had received hundreds of approaches for both its pharmacy and farms business.
"We're not a forced seller for either. In the unlikely event that we were not to get the sort of interest that we anticipate, we would not have to sell," he said.
Pennycook said one option for the latest capital raise would be a so-called "tail-swallow" which would involve it selling some rights to new shares in the bank to generate enough money to cover the cost of taking up the rest. That would not require the group to inject new cash and would limit how much its stake is reduced by.
Co-op still owes the bank 163 million pounds from the first fundraising, which it said would be paid by the end of 2014.
It said its core businesses delivered a solid performance in tough markets. Like-for-like sales in its food stores fell 0.2 percent, while sales on the same basis in its convenience store chain rose 1.6 percent.
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