The competition watchdog has intervened in Greene King’s proposed £774m takeover of rival Spirit Pub Company, raising the prospect of a full-blown investigation which is likely to lead to the brewer selling off some pubs.

The Competition and Markets Authority (CMA) said about one-third of the companies’ combined 3,000 pubs overlapped in some way, with 16 locations in particular where minimal competition existed. The CMA concluded that competition could be damaged by the merger, potentially leading to higher prices or poorer customer service.

The CMA has given Greene King five days to address its concerns. Changes are likely to include selling off pubs but could also feature changes to opening hours. The watchdog did not say where the pubs overlapped, how big the local areas were or how many pubs were involved.

Sheldon Mills, the CMA senior director of mergers, said: “Overall, we did not find major concerns with this transaction, given that most of the parties’ pubs face local competition from national pub chains or independent rivals.

“In a small number of areas, we found that after the merger the parties would operate pubs in close proximity without facing sufficient competition from rivals and we are concerned this could lead to a rise in the price of food or drink or a reduction in the quality of those pubs.”

Greene King, which brews Old Speckled Hen and Abbott Ale and operates chains such as Hungry Horse and Loch Fyne, said it intended to offer concessions to meet CMA concerns.

Rooney Anand, Greene King’s chief executive, said: “This is a sensible decision by the CMA, reflecting a small number of local areas where competition may be diminished as a result of our acquisition of Spirit. We are confident we will be able to offer suitable undertakings, which will keep the number of pubs we need to sell to a minimum and allow the acquisition to complete before the end of June.”

The companies agreed to the takeover in November after lengthy talks to create Britain’s biggest managed pub business. Greene King wooed Spirit in an attempt to expand in London and south-east England, where people have more money to spend on drinking and eating out. Greene King also hopes to save £30m a year in costs. The brewer has 1,900 pubs and restaurants, while Spirit has 1,200 outlets. The combined businesses employ 40,000 people.

Greg Johnson, an analyst at stockbroker Shore Capital, said: “We thought there would be some local markets, as the CMA refer to them, that would come under scrutiny. [Greene King] are keen to close [the deal]. They’ve put a lot of time and effort into it. The issue was always going to be how many pubs they would have to sell.”

The companies extended the planned completion date to the end of June. Johnson said this suggested they expected to get round CMA objections and avoid an in-depth “phase 2” investigation.

The CMA ruling follows another high-profile intervention, in which it subjected Poundland to phase-2 scrutiny of its takeover of 99p Stores.