UPDATE 2-Valeo shares up on M&A talk; bankers sceptical

* BoA Merrill Lynch to give Valeo report in a month - source

* All options are open - source

* Valeo shares up 3.6 pct on M&A speculation

* Bankers think major strategic move unlikely

(Adds banker, analyst quotes, background and context)

By Helen Massy-Beresford and Gilles Guillaume

PARIS, June 4 (Reuters) - Shares in French car parts maker Valeo (VLOF.PA) jumped on Friday on speculation it could sell all or part of its activities or merge with a competitor, even as banking sources played down chances of a big strategic move.

Valeo is due to receive a report on possible strategies in around a month, a source close to the matter told Reuters on Friday, after the French company recently hired Bank of America Merrill Lynch (BAC.N) to advise on improving Valeo's valuation.

"All the options are open, it's up to the bank to come back now with its proposals," the source said. "The bank has a blank sheet of paper," he added.

A Valeo spokeswoman declined to comment on the specifics. Bank of America Merrill Lynch was not immediately available to comment.

By 1150 GMT Valeo shares were up 3.6 percent at 24.36 euros, sinking back from earlier highs as the market traded down too. The CAC-40 index .FCHI down 1.3 percent.

"What they want to do? What they are going to sell? Who could buy? ... The M&A frenzy has just started on Valeo," one Paris-based trader said.

Valeo shares had already gained 7.5 percent on Thursday after the group said it was confident about meeting full-year targets. [ID:nLDE6521NT]

The New York Times reported a sale of a major unit, a leveraged buy-out to take the company private and a merger with a North American counterpart were among the options that would be considered.

The auto supply sector, hit hard by the deep industry downturn, has seen major consolidation in recent years. Ball-bearings maker Schaeffler took control of Germany's Continental (CONG.DE) in 2008 in an $18 billion deal.

France's Faurecia (EPED.PA) has played a smaller role in sector consolidation, with its purchase of Plastal assets in Germany and U.S.-based Emcon Technologies.

"PROACTIVE DEFENCE"

But banking sources played down the likelihood of a major move for Valeo.

In March, Valeo presented a new strategic plan designed to boost profitability by focusing on key technology areas and growing in lucrative emerging markets. [ID:nLDE62909O]

A banker familiar with the company said: "It's not entirely clear they want to sell all or part of the company."

He added: "We work with them as well and I don't think there is much to this."

Another source close to the situation told Reuters a leveraged buy-out of the company would be "a complete non-starter right now, given tough debt-financing markets."

The source said that two years ago private equity firm TPG and an investment arm of the Canada Pension Plan both separately considered possible takeovers of Valeo.

The source thought the mandate was a form of "proactive defence" that would leave Valeo ready with a response if it were to receive an unsolicited takeover approach.

Societe Generale analyst Philippe Barrier said the move to appoint a bank was logical, as the company did not consider its share price reflected the company's potential: "The objective will be to establish a list of all the remedies," Barrier said.

But the possibilities set out in the New York Times article are not radical ideas. "The kinds of ideas mentioned are circulated by all share-price advisers," Barrier said.

Valeo chief executive Jacques Aschenbroich told the company's annual shareholders' meeting on Thursday that a bank had been appointed as part of its recently announced strategic plan. He declined to say which one.

Asked on Thursday if the bank had been mandated to advise on changes to the company's structure, Aschenbroich replied:

"No, I've said clearly it's part of the strategic plan presented and approved by the board two and a half months ago. We don't change our minds like that, we're really focused on this plan."

The bank would "help us to communicate better, to better focus our message," Aschenbroich said. "Perhaps they will have some ideas, but for the moment it is how better to make the market understand more quickly that Valeo has changed."

The French state owns 8.99 percent of Valeo, through its strategic investment fund FSI and state-owned CDC banks, a Valeo spokeswoman said.

U.S. investment fund Pardus owns 14.88 percent of Valeo, the spokeswoman added. Valeo has had a turbulent relationship with its biggest shareholder, with Pardus repeatedly pushing for more board representation and greater influence on strategy.

Former CEO Thierry Morin stepped down in March last year after differences with the board. (Reporting by Helen Massy-Beresford and Gilles Guillaume; Additional Reporting by Dominique Vidalon, Blaise Robinson, Quentin Webb and Nina Sovich; Editing by Marcel Michelson and Jon Loades-Carter)