A surge in profits kept Chef & Brewer owner Spirit in the takeover spotlight today as it prepares to back a £725million bid by Bury St Edmunds-based Greene King.

Spirit, whose estate of 794 managed pubs also includes the brands Fayre & Square, Flaming Grill, Taylor Walker and John Barras, posted an 11% rise in underlying profits to £60million in the year to August 23.

The results were published as Spirit holds talks with Greene King about a tie-up which will hand its shareholders a 29% stake in a combined company. Spirit is minded to accept the proposal as long as it can agree final terms.

There was no further update on the negotiations today as Spirit highlighted a “strong year” of trading, with like-for-like sales at its managed pubs division up by 4.4% despite the impact of volatile consumer trading conditions.

It has set aside £75m for expansion and said it believes there is the opportunity to build a branded pub estate of around 1,200 sites.

The company also has 433 pubs in its leased estate, the majority of which are former managed sites with an average annual net income of over £100,000.

Net income at the leased sites was up 4.2% on a like-for-like basis after four consecutive quarters of growth, leading to a 10% rise in average earnings per pub of 10%.

Spirit chief executive Mike Tye said: “It’s been a strong year for Spirit, driven by effective execution of our clear and consistent strategy.

“Our managed division continues to outperform the market with its strong portfolio of brands, while our leased division is delivering market-leading performance and is in growth. We ended the year with a healthy balance sheet and strong earnings and dividend growth, underpinned by good cash generation.

“Looking to the future, the business is well positioned for further progressive growth, both organically from our existing portfolio and through acquisitions. We see significant opportunity to roll out our successful brands and currently have £75m to fund expansion.

“While the consumer environment remains volatile, we are confident that our customer proposition and sustained focus on delivering hospitality excellence for our guests will provide the necessary firepower to grow market share and continue to deliver value for all our stakeholders.”

Greene King, which already has around 1,900 outlets, approached Spirit about a combination last month but its initial offer of 100p a share or £661m was rejected by Spirit as undervaluing the business. Its latest cash and shares offer is worth about 109.5p a share.

The Suffolk-basec group is shifting the balance of its estate towards directly managered retail sites rather than less profitable tenanted operations.

Greene King’s pub and restaurant brands include Hungry Horse, Loch Fyne Restaurants and Eating Inn while its beers include Old Speckled Hen, Greene King IPA and Abbot Ale.