UPDATE 5-Li Ka-shing readies $5.6 bln E.ON UK network bid

* More than two bidders for E.ON's UK network -source

* Canada Pension Plan and ADIA pull out of auction -sources

* Li's bid would build on UK power network

* E.ON, regulators decline to comment

* E.ON shares rise, outperform utilities index

(adds byline, releads, adds Li Ka-shing one of two bidders still in the running, updates shares)

By Edward Taylor and Denny Thomas

FRANKFURT/HONG KONG, Jan 24 (Reuters) - Hong Kong billionaire Li Ka-shing is readying a reported 3.5 billion pound ($5.6 billion) bid for E.ON's UK power networks, after a preferred Canadian and Abu Dhabi consortium walked away.

Li is one of more than two bidders still in the race and E.ON is keen to complete the transaction in the first quarter, a source familiar with the deal told Reuters on Monday.

Li's investment unit Cheung Kong Infrastructure (CKI) (1038.HK) first made a 3.5 billion pound approach to the German utility late last year, hoping to enlarge a power portfolio that includes EDF's (EDF.PA) UK network, the Sunday Times reported.

The businessman has been expanding his business empire by buying into regulated assets in developed countries.

CKI had hired Deutsche Bank to advise it, the newspaper said. Deutsche declined to comment.

E.ON put its UK networks up for sale in December as part of a promise to investors that it would divest assets worth 15 billion euros through to 2013, in order to guarantee minimum dividends while it builds up new markets. [ID:nLDE6A90NG]

Sources familiar with the matter told Reuters on Monday that the Canada Pension Plan Investment Board (CPPIB) and Abu Dhabi Investment Authority (ADIA), the emirate's sovereign wealth fund, were no longer in talks to buy E.ON's UK electricity distribution business after having made an offer.

E.ON, the world's largest utility, had given the consortium until mid-January to make a firm bid and had hired JP Morgan to handle the sale, the Sunday Times reported last December.

E.ON, which has suffered a big hit to earnings from slumping power prices and industrial production in Europe, declined to comment. Depressed sector valuations have prompted interest from cash-rich companies outside the region which are looking for steady income-generating assets.

"It's a good time to do such an acquisition as Li can extract a bargain when Europe is struggling for a recovery," said Linus Yip, chief strategist at First Shanghai Securities.

Analysts said that the reported 3.5 billion pound price tag was in line with their valuations for the E.ON business. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on Chinese acquisitions: r.reuters.com/zan75r) ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

CKI'S CASH GENERATOR

Shares in the utility giant were down 0.3 percent at 24.98 euros by 1427, reversing earlier gains and underperforming a flat European utilities index .SX6P. Shares in CKI closed up 1.1 in Hong Kong, while Hongkong Electric gained 0.8 percent. Last year, Li Ka-shing used CKI and his other investment arm Hongkong Electric (0006.HK) to buy the network business of French utility EDF, which provides power to London and southeast Britain, for 5.8 billion pounds.

If he adds the E.ON business, which delivers power to more than 5 million customers across central England, the combined network would cover 30 million people, the Sunday Times said.

Mark Friend, a competition lawyer at Allen & Overy, said any deal was unlikely to meet regulatory hurdles because prices charged by UK power network operators are currently capped. This cap is based on inflation, capital investment and efficiencies.

"It seems pretty straightforward from a merger control perspective; electricity distribution networks are natural monopolies that do not compete with each other and the Office of Fair Trading would have no powers under existing legislation to refer such a merger to the Competition Commission," Friend said.

Britain's energy regulator Ofgem said it did not comment on market speculation. The UK's Office of Fair Trading said it had no comment, while CKI was not available for comment.

CKI, has flagged its interest in buying more infrastructure assets following the purchase of EDF's assets.

CKI Group Managing Director Kam Hing Lam has said it is looking at more than 10 projects and had cash on hand of more than HK$10 billion at the end of June last year. [ID:nTOE67U081]

(Additional reporting by Quentin Webb in London, Greg Roumeliotis in Amsterdam, Sudip Kar-Gupta in London, Tom Kaeckenhoff in Duesseldorf and Alison Leung and Donny Kowk in Hong Kong; writing by Sophie Walker; Editing by Ken Wills, Anshuman Daga and Alexander Smith)