UPDATE 2-Illinois Tool to sell stake in unit for $1.05 billion

* Will use cash proceeds for share buybacks

* Buyer is fund managed by Clayton, Dubilier & Rice

* ITW to retain 49 pct stake in unit; shares up 1.9 pct

By Nick Zieminski

Aug 16 (Reuters) - Illinois Tool Works Inc will sell a majority stake in its decorative surfaces unit to a fund managed by private equity firm Clayton, Dubilier & Rice, for about $1.05 billion, ITW said on Thursday.

Illinois Tool, which will retain a 49 percent stake in the business, will use most of the cash proceeds to buy back shares.

The deal is expected to close in the fourth quarter.

Shares of the company were up 1.9 percent at $58.68 in midday trading.

ITW said the CD&R fund would pay $395 million, and the rest would be borrowed by the new company formed in the deal.

The company also reaffirmed its third-quarter earnings forecast.

The decorative surfaces unit, which provides materials like laminates and adhesives for countertops and furniture for commercial and home construction markets, recorded $1.1 billion in sales last year. ITW had total sales of nearly $15 billion.

The unit will become a new company operating as Wilsonart International Holdings, led initially by a CD&R operating partner.

CD&R has been an active acquirer of industrial assets.

In 2010, it bought a controlling stake in Tyco International Ltd's electrical and metal products business. Last year, Ingersoll Rand Plc completed the sale of 60-percent stake in Hussmann supermarket display cases to funds managed by the private equity firm.

A CD&R representative declined to comment on the strategy behind the purchases.

Chief Executive David Speer has said ITW will ramp up divestitures and simplify its business this year after discussions with activist investor Relational Investors.

Glenview, Illinois-based ITW makes a variety of items, including restaurant supplies, construction products, electronic components, auto parts and industrial packaging.