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UPDATE 5-Brazil merges pulp giants with state development bank's blessing

(Recasts with details, analyst report)

SAO PAULO, March 16 (Reuters) - Brazil's Suzano Papel e Celulose SA won the battle for control of larger rival Fibria Celulose SA, creating the world's biggest wood pulp producer with the blessing of state development bank BNDES, a common shareholder in the two companies.

The new company will lead world pulp production with a total capacity of 11 million tonnes of pulp a year, more than double the 5 million tonnes in production capacity by the world's second-largest producer, International Paper Co, according to Poyry, a paper and pulp consultancy firm.

Controlling shareholders Votorantim Participações SA and BNDESPar, the investment arm of Brazil's state development bank BNDES, agreed to a Suzano proposal early on Friday.

The outcome underscored the continued influence of the state bank, which has been used by Brazil's government in the past to engineer "national champions" a policy publicly disavowed by the bank in recent years.

Suzano will spend 29 billion reais ($8.82 billion) in cash and 255 million shares to acquire Fibria, with a total deal value of 36 billion reais considering prices at mid-morning trading in Sao Paulo.

Controlling shareholders chose Suzano even after Netherlands-based Paper Excellence BV sweetened its bid for Fibria to 71.50 reais per share, in a 39.6-billion reais all-cash offer.

Fibria shares fell were almost 10 percent down in mid-morning trading in Sao Paulo and Suzano shares rose 17.4 percent, as analysts saw the Fibria acquisition as a good deal for Suzano.

"At current share prices, we believe the transaction is more favorable to Suzano's minority shareholders than Fibria's," Credit Suisse analyst Ivano Westin wrote in a note to clients.

Credit Suisse calculations, based on Thursday's closing prices, point out to an offer equivalent to 63.30 reais per share, including the 52.50 reais cash offer by Suzano.

Banks JPMorgan Chase & Co, BNP Paribas, Mizuho Bank Ltd and e Rabobank NA are financing $9.2 billion to Suzano. Analysts expect huge sinergies, of 12 billion reais.

Explaining the reasons for Suzano choice on Friday, BNDES director Eliane Lustosa said Paper Excellence's bid was not firm. "We saw it as an intention to present a proposal. Paper Excellence did not present financing for the bid or guarantees", Lustosa said.

Lustosa added that BNDES considered Suzano proposal as firm. The bank will receive 8.5 billion reais in cash and an 11-percent stake in the new company, the largest divestment in the bank's history.

The deal is still subject to antitrust approval in Brazil, the United States, the European Union and China, Fibria said. An escape clause in the deal would allow Suzano to call it off if regulators force the sale of more than 1.1 million tonnes of capacity.

Paper Excellence, controlled by the Wijaya family, which also owns Asia Pulp & Paper Company Ltd, offered to pay a $1.2 billion break-up fee if the deal failed to get funding, the source said, but it was not enough to sway the state bank.

($1 = 3.28 reais) (Additional reporting by Rodrigo Viga Gaier in Rio de Janeiro, Paula Laier and Alberto Alerigi Jr. in Sao Paulo Editing by Brad Haynes, Daniel Flynn and Nick Zieminski)