* Bulgari family to become LVMH's No. 2 family shareholder
* LVMH to launch buyout offer for rest of shares
* Deal values Bulgari equity at 3.7 billion euros
* Total value of the deal including debt is 4.3 bln euros
(Adds fund manager comment, details, CEO quotes)
PARIS/MILAN, March 7 (Reuters) - French luxury group LVMH (LVMH.PA) is buying Italian peer Bulgari BULG.MI for 3.7 billion euros ($5.2 billion), adding lustre to its jewellery business and broadening its exposure to emerging markets.
The offer, at a 60 percent premium to Bulgari's average share price over the past month, could herald the return of consolidation in the luxury market, which bounced back from the 2009 slump much faster than analysts expected.
Bulgari will benefit from world No. 1 LVMH's global retail network, improve margins through cost-sharing and help the owner of Louis Vuitton handbags close the gap with bigger watch and jewellery companies Richemont (CFR.VX) and Swatch (UHR.VX).
Analysts said the high price was justified by the savings.
"The high price is probably explained by the fact that there were rival suitors," said fund manager Gerard Moulin from Delubas Asset Management in Paris.
Rival bidders included the Richemont group and PPR (PRTP.PA), sources close to the groups told Reuters on Monday. Both groups declined to comment.
Any acquisition of family-controlled assets usually sees a buyer paying a sizeable premium to convince families to sell.
The deal valued Bulgari on a ratio of enterprise value to sales of about 3 times, compared with other potential takeover candidates Burberry (BRBY.L) on 2.7 times and Tiffany (TIF.N) on 2.3 times, using forward sales estimates.
"This multiple is in line with historic deals in the sector and the recent acquisition of (online luxury fashion retailer) Net-a-porter by Richemont," which was roughly 3 times enterprise value to sales, Deutsche Bank said in a note.
The total value of the deal, including 600 million euros of convertible bonds, was 4.3 billion. It will be paid for with 1.9 billion euros of new LVMH shares and 2.4 billion cash to buy out minority shareholders, financed half with debt and half with LVMH's available cash.
Spearheaded by Arnault, LVMH was built on acquisitions and its brands also include Chaumet and Fred jewellery, Celine and Kenzo fashion, Hennessy cognac and Moet & Chandon champagne.
"Bulgari is one of the best known jewellery brands in the world, with lots of potential to grow on the back of LVMH's global distribution reach and financial muscle," Bernstein luxury analyst Luca Solca said.
The deal will double LVMH's watch and jewellery business to make up 10 percent of its sales and about 6 percent of operating profit, analysts estimated.
Analysts believe the deal could lead rival groups to embark on a fresh consoldation wave, encouraged by the strong sales visibility they are getting from big emerging luxury markets such as China.
Bulgari BULG.MI, established in 1884, had long been seen as a potential target having weakened its finances by embarking on big store investments when its sales were falling. There was regular speculation Swiss group Swatch could take it over.
The transaction comes after LVMH built up a 20.2 percent stake in smaller rival Hermes (HRMS.PA) which, like Bulgari, is family controlled. That move prompted Hermes to fight back by creating a controlling family holding within the group to block LVMH's advance.
LVMH will buy the family's holding in Bulgari of 50.4 percent of Bulgari by issuing 16.5 million LVMH shares. [ID:nBIA07382] [ID:nBIA07381]. In exchange, the Bulgari family will hold a 3.5 percent stake in LVMH and become the luxury group's second largest family shareholder.
"It is important the quality of the paper that you get and LVMH is high quality paper," Bulgari Chief Executive Francesco Trapani said in a conference call explaining why the jeweller had chosen to do a deal with LVMH.
The French group also will launch a buyout offer for the rest of Bulgari shares at 12.25 euros a share.
Graphic on European luxury goods sector comparison:
Graphic on M&A league tables: r.reuters.com/kyb46q
BREAKINGVIEWS-Arnault bags Bulgari: [ID:nLDE7260RP]
The Bulgari family will name two representatives to the LVMH board while Trapani will join LVMH's executive committee and run its watches and jewellery activities from the second half.
"This should be a catalyst for possible targets in the sector," a French broker said. "As such, we would (see ...) that as a positive for Burberry Group Plc (BRBY.L) notably." Burberry shares were up 3.6 percent.
However, shares in family-controlled Italian luxury leather goods maker Tod's (TOD.MI) were up more than 6 percent on Monday on the back of speculation it could become the next target.
Tod's founder and chairman Diego Della Valle sits on the board of LVMH and owns a small stake in the French luxury giant.
Bulgari shares closed at percent at 12.07 euros while LVMH closed up 1.2 percent at 112.95 euros. (Additional reporting by Antonella Ciancio in Milan and Silke Koltrowitz in Zurich; Editing by David Cowell) ($1 = 0.7139 euro)