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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 ageing plants, are likely to drive a hard bargain in a flotation which may not achieve a market value much above 1.5 billion zlotys ($478 million).

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

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

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

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

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

Last week German insurer Talanx successfully completed a stock market debut in Frankfurt and has seen its shares trade up since.

But the market is still not wide open, with investors remaining choosy, focused on companies with strong growth prospects, good earnings and seeking valuations which are not too ambitious.

"Overall, if the (ZE PAK) offering is priced low, that is at around 1.5-1.6 billion zlotys, then it should work," said Dawid Czopek, fund manager from BRE Wealth Management with assets exceeding 1 billion zlotys.

ZE PAK controls power stations with a capacity of less than 2.5 gigawatts, or some 8 percent of the country's total capacity, and produces 96 percent of its power from lignite, the second most important source of energy in Poland after hard coal.

Top local utilities, mainly lignite-fired PGE and coal-fired Tauron , have underperformed the market in past weeks, reflecting a decline in power prices amid worries over the scale of economic slowdown in Poland.

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

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

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

Details of the company's business such as its future dividend policy, investment plans and the assessments of potential risks are likely to be revealed in the company's prospectus.

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

Fund managers and analysts contacted by Reuters believe the offer will likely interest local pension funds, which have a long-term investment horizon, as well as retail investors, if the price is right.

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

"Foreign investors are not even interested in PGE too much today, even though it is a hell of a better company," another fund manager added.

"Besides, many funds see better opportunities on other markets, China for example," a person close to the transaction said.

What could lure investors would be prospects for dividends.

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

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

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

Keywords: POLAND IPO ZEPAK