UPDATE 1-Sprint rejects $5 billion investment offer--source

(Adds details on offer from source, background)

NEW YORK Nov 29 (Reuters) - Sprint Nextel Corp (S.N) has rejected a $5 billion investment by a group including former chairman Tim Donahue, South Korea's SK Telecom Co Ltd (017670.KS) and Providence Equity Partners, a source familiar with the matter said on Thursday.

The offer, submitted before the U.S. Thanksgiving holiday last Thursday, was in the form of convertible-preferred securities that could be converted into equity for 20 percent more than Sprint's current stock price, said the source, who did not want to be identified.

Sprint, whose market value is around $43 billion, declined to comment. Donahue, Providence and SK Telecom could not immediately be reached.

SK Telecom, South Korea's top mobile phone operator, is seeking to expand in the United States and announced earlier this month it was boosting its investment in Helio, a wireless joint venture with EarthLink Inc (ELNK.O).

The No. 3 U.S. mobile service has lost market share to rivals such as AT&T Inc (T.N) and Verizon Wireless, and it is looking for a new chief executive to replace Gary Forsee who stepped down earlier this year.

The Wall Street Journal earlier reported on its Web site that the investor group had also sought to install Donahue as chief executive.

"We have a search process in place," said Sprint spokeswoman Leigh Horner.

Rumors have abounded about the potential for a bid for Sprint as its shares languish due to subscriber losses. Many analysts have said the possibility for a takeover would be low because to Sprint's large market capitalization.

"I'm not surprised Sprint reportedly rejected the investment offer. Sprint is suffering from a lot of problems, but I do not think they're facing a liquidity crunch," said Stanford Group analyst Michael Nelson.

Besides SK Telecom, investors have also speculated that Britain's BT Group Plc (BT.L) may be interested.

Sprint shares were up 8 cents at $15.28 in after hours trading.

Earlier in November, Sprint reported a 77 percent drop in third-quarter net profit to $64 million, or 2 cents per share, as it lost 60,000 subscribers. It also withdrew its 2008 profit growth forecast, dampening any hopes for a near-term recovery.

Sprint has suffered from customer service problems, U.S. economic weakness and problems integrating its 2005 purchase of Nextel Communications. (Reporting by Michael Flaherty, Sinead Carew and Ritsuko Ando; editing by Andre Grenon)