Investors to drive hard bargain in sale of Poland's ZE PAK

* Flotation likely to value utility at $478-637 mln

* Could attract local pension funds, retail investors

* Mutual funds, foreign investors cool on prospects

By Agnieszka Barteczko and Maciej Onoszko

WARSAW, Oct 9 (Reuters) - Would-be investors in ZE PAK,eyeing jittery financial markets and the Polish utility's ageingplants, are likely to drive a hard bargain in a flotation whichmay not achieve a market value much above 1.5 billion zlotys($478 million).

The sale of a 50-percent stake in Poland's fifth-largestutility, whose prospectus will be made public on Wednesday, hadbeen expected to make a hefty contribution to the government'starget of 10 billion zlotys in state asset sales this year.

It will also be Poland's highest-value initial publicoffering (IPO) to date in a year that has so far been short ofeye-catching listings.

Bookrunners value the company at 1.5-3.7 billion zlotys,market sources told Reuters last month, and the sale comes asthe local stock market has gained ground, rebounding fromthree-year lows struck in May.

But the recovery - Warsaw's large-cap index is up 12 percentyear-to-date - is vulnerable to bad news from the crisis-hiteuro area or signals of a slowdown in the global economy.

After months of inactivity, the European market for newlistings has seen a revival of share sales over the last month,with improved investor sentiment encouraging firms to test thewaters.

Last week German insurer Talanx successfullycompleted a stock market debut in Frankfurt and has seen itsshares trade up since.

But the market is still not wide open, with investorsremaining choosy, focused on companies with strong growthprospects, good earnings and seeking valuations which are nottoo ambitious.

"Overall, if the (ZE PAK) offering is priced low, that is ataround 1.5-1.6 billion zlotys, then it should work," said DawidCzopek, fund manager from BRE Wealth Management with assetsexceeding 1 billion zlotys.

ZE PAK controls power stations with a capacity of less than2.5 gigawatts, or some 8 percent of the country's totalcapacity, and produces 96 percent of its power from lignite, thesecond most important source of energy in Poland after hardcoal.

Top local utilities, mainly lignite-fired PGE andcoal-fired Tauron , have underperformed the market inpast weeks, reflecting a decline in power prices amid worriesover the scale of economic slowdown in Poland.

The IPO's bookrunners will have to convince investors thatZE PAK is a better buy.

"The company is rather weak. Its power plants are old, someof them will have to be shut down, they emit a lot of CO2," afund manager said on a condition of anonymity.

"Additionally, ZE PAK's lignite mines will soon have to facethe challenge of depleting resources."

Details of the company's business such as its futuredividend policy, investment plans and the assessments ofpotential risks are likely to be revealed in the company'sprospectus.

Although low CO2 prices make lignite the cheapest source ofenergy in Poland, ZE PAK's costs exceed those of PGE as thelargest Polish utility has easier access to lignite deposits.

Fund managers and analysts contacted by Reuters believe theoffer will likely interest local pension funds, which have along-term investment horizon, as well as retail investors, ifthe price is right.

Local mutual funds might be picky, analysts said, whileforeign investors remain cool as ZE PAK will be too small toenter indices such as MSCI Poland or Warsaw's bluechip WIG20.

"Foreign investors are not even interested in PGE too muchtoday, even though it is a hell of a better company," anotherfund manager added.

"Besides, many funds see better opportunities on othermarkets, China for example," a person close to the transactionsaid.

What could lure investors would be prospects for dividends.

A 48 percent stake in ZE PAK held by local millionaireZygmunt Solorz-Zak is not offered in the IPO.($1 = 3.1403 Polish zlotys)

(Additional reporting by Kylie MacLellan in London; Editing byDavid Cowell)

((maciej.onoszko@thomsonreuters.com)(+48 22 653 97 11)(ReutersMessaging: maciej.onoszko.reuters.com@thomsonreuters.net))