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UPDATE 2-PPR exits book and music retailing to focus on luxury

* Plan could see Fnac spin-off or initial public offering

* Loss-making business long seen as tough sale

* PPR shares rise nearly 3 pct

(Adds detail, analyst comment, background)

By Pascale Denis and Astrid Wendlandt

PARIS, Oct 8 (Reuters) - France's PPR will exit its declining Fnac music and book retailer to focus on its more profitable luxury and sports brands, such as Gucci and Puma, a source familiar with the matter said on Monday.

"PPR's board is due to meet tomorrow on the plan to split from Fnac before it is presented to the brand's workers," the source told Reuters. "The exit plan is not completely decided, it could consist of a spin-off or stock market listing."

PPR could sever ties with Fnac by either putting its assets in a separate legal entity which could either be sold to a third party, or to investors in the stock market through an initial public offering (IPO).

However, analysts said an IPO was usually reserved for growth stories, not declining businesses.

The source added that the plan will then be put to shareholders for approval at next year's annual general meeting in the spring.

PPR has been trying to sell its retail businesses for several years to concentrate on its luxury and sports brands and take advantage of strong growth in mainland China and tourist purchases in its U.S. and European stores.

PPR, the world's third largest luxury group behind LVMH

and Switzerland's Richemont , owns fashion brands Yves Saint Laurent, Balenciaga, Bottega Venetta, Stella McCartney and Alexander McQueen.

Getting rid of Fnac was always seen by analysts and bankers as the most difficult step as the unit's sales and profits had been dwindling steadily in recent years, hit by music piracy and fierce competition from the Internet.

Analysts estimate PPR's net debt at the year end should stand at around 2.5 billion euros, including proceeds from the CFAO sale, but they struggled to pin down how much of that debt could be attributed to Fnac.

Investors cheered the prospect of seeing PPR free from Fnac, sending the shares up as much as 3 percent. The stock was 2.5 percent higher at 0920 GMT, the only gainer on a 1.2 percent weaker French blue-chip CAC 40 index .

TOUGH SALE

"There is a lot of negative sentiment around Fnac," one London-based analyst said. "Some people thought PPR might have to close it down for a loss but they could not do that because of the unions."

PPR would face resistance from the French government, which is trying to fight the country's rising unemployment and putting pressure on corporate groups to maintain jobs.

France's labour minister, Michel Sapin, said on Monday the French government was watching closely PPR's decision to cut ties with Fnac and its impact on jobs.

PPR sold Conforama last year and in July it raised 968 million euros ($1.26 billion) by selling off its remaining stake in distribution unit CFAO to Japan's Toyota Tsusho Corporation (TTC).

Last week, PPR Chief Executive Francois-Henri Pinault said he would update investors on plans to sell PPR's Redcats mail order unit before Oct. 25.

PPR has been struggling to get bids for Redcats at the valuation it wanted and bankers have long viewed Fnac as an even tougher sale.

"If you look at it in terms of electronics, they're definitely in trouble," said one Paris-based investment banker. "Bookshops aren't in the best shape either."

Fnac last year made earnings before interest and tax (EBIT) of 103 million euros, down 46.5 percent, on revenue of 4.1 billion euros, down 3.2 percent, yet analysts estimate the business would only be worth 500-800 million euros.

Analysts at CM-CIC Securities put a value of 775 million euros on Fnac, or 6.1 euros a share, saying a spin-off was a suitable option given "the difficulty of selling this asset".

"Fnac has a good chance of attracting private equity or industrial bids," a Paris-based trader said, citing a price of around 550 million euros. "On the other hand, an IPO of Fnac would not be an easy thing to organize in the current market mood."

Fnac made an EBIT loss of 7.5 million euros in the half year to June 30 while its luxury divisions made a profit of 727.1 million euros.

Fnac sales in stores have been declining but its Internet sales have been growing, up 15.3 percent in the half-year totalling 209 million euros, which is 12 percent of Fnac's total revenue.

PPR last year kicked off a restructuring plan for Fnac, called Fnac 2015, aimed at making the retailer more competitive, with a wider offer of toys and home electronics.

Fnac, which has outlets in Brazil, Italy, Spain, Switzerland and Belgium, employs 18,000 staff, with about 12,000 in France.

PPR declined to comment. ($1 = 0.7657 euros)

(Additional reporting by Christian Plumb and Blaise Robinson; Editing by Christian Plumb and Louise Heavens)

((james.regan@thomsonreuters.com)(+33)(0)(1 49 49 53 84)(Reuters Messaging: james.regan.thomsonreuters.com@reuters.net))

Keywords: PPR FNAC/