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UPDATE 1-Govt backs Bouygues on SFR bid as Vivendi board meets

(Adds France's industry minister comments, details)

PARIS, March 14 (Reuters) - France's industry minister weighed in to the battle for telecoms company SFR on Friday, the day the board of parent Vivendi is expected to pick a winner, to point out "problems" with the bid from cable group Numericable.

The minister, Arnaud Montebourg, said he believed Vivendi "preferred" the Numericable proposal over that of Conglomerate Bouygues but said he saw "a number of problems" with that outcome.

He said the government, with its desire to protect jobs, was in favour of reducing the number of players in the market to three, something the Bouygues deal would do but the Numericable one would not.

He also said there was a "fiscal problem" surrounding Numericable in that it had a holding company in Luxembourg and was quoted in Amsterdam while its controlling shareholder, Patrick Drahi through his group Altice, was a Swiss resident who keeps his holding in Guernsey.

"There is also a competition problem," he added, speaking on a French radio station. "Numericable has a cable monopoly in France".

Vivendi said: "the board will meet today and will decide".

For Vivendi, having two bidders for SFR is a surprising twist in a saga that began in spring 2012, when veteran chairman Jean-Rene Fourtou declared there would be "no taboo" in re-examining the 160-year-old group's unwieldy holdings that ranged from video games to broadband in Brazil.

Fourtou became convinced that Vivendi should exit telecoms, to focus more on its media businesses, after seeing the damage wrought by a price war in France touched off by low-cost player Iliad.

Once the group's cash cow, SFR began to drag down Vivendi's results and core operating profit halved from 2011 levels to 1.07 billion euros at the end of 2013.

To revamp Vivendi, Fourtou in July 2013 sold the profitable and growing video game unit Activision Blizzard to pay down debt, and in November he sold Maroc Telecom, raising in total roughly 10.4 billion euros for both.

The stage was set to split off SFR into a separate company by July, but now that option looks less likely with Numericable and Bouygues swooping in with bids.

Bouygues, which is now third place in French mobile, wants to buy SFR to shore up its telecom business, which has been hit hard by the arrival of Iliad's Free Mobile service.

For Numericable, now primarily a seller of television and broadband, a tie-up with SFR would allow it to become a major player in mobile and grab a large network of stores and sales staff.

Vivendi's board will debate the merits of both bids, as well as the spin off option, and may make a decision by the day's end to open exclusive negotiations with Bouygues or Numericable.

Alternatively, the board, which also includes vice-chairman and second-largest shareholder Vincent Bollore, could choose to take more time to weigh its options.

Lastly, Vivendi could shelve the two bids and pursue the spin off, although in that case it would pass up the billions in cash that the two bidders are offering.

Bouygues has offered Vivendi 11.3 billion euros ($15.7 billion) in cash and a 43 percent stake in the combined entity, which would be spun off and listen on the stock market if regulatory approval was secured.

A combined Bouygues-SFR would be France's biggest mobile carrier with 32 million customers and 42 percent market share compared with 35 percent for current leader Orange.

Numericable on March 5 bid 10.9 billion euros in cash and a 32 percent stake in the new company. Three people close to the situation, but without direct knowledge of the Numericable bid, said on Thursday that the company had raised the cash portion of its bid by as much as 850 million euros.

(Additional reporting by Maya Nikolaeva and John Irish; Editing by Andrew Callus)