UPDATE 1-Telefonica buys 11 pct of Mediaset's pay-TV business
* Telefonica agrees to pay 100 mln euros for Mediaset Premium stake
* Deal marks further expansion of Telefonica into pay-TV
* Mediaset in talks with other potential investors
* Shares up 3 pct (Adds details, shares)
MILAN, July 7 (Reuters) - Spanish telecoms group Telefonica has agreed to buy an 11.1 percent stake in the Italian pay-TV business of Silvio Berlusconi's media group Mediaset for 100 million euros ($136 million), Mediaset said on Monday.
The deal marks a further expansion of Telefonica into the pay-TV industry days after buying Mediaset Espana's 22 percent stake in Madrid-based pay-TV firm Distribuidora de Television, known as Canal+.
Monday's agreement will also give Mediaset an ally at a time when it is facing increasing costs for TV rights.
Mediaset shares rose 3 percent to 3.8 euros by 0703 GMT, outperforming Milan's flat blue-chip index.
Mediaset said it would transfer its pay-TV activities to a new company which will have an equity value of 900 million euros.
Analysts at ICBPI said in a note to clients this valuation appeared to be high given persistent uncertainties over future profitability given expensive soccer TV rights.
Deputy Chairman Pier Silvio Berlusconi, son of former prime minister Silvio, said last week Mediaset was in talks with Qatari-owned broadcaster Al Jazeera and other players to cooperate in the pay-TV business in Italy.
He said Italy's biggest commercial television broadcaster was also in talks with French group Vivendi in an interview with daily Corriere della Sera published on Monday.
"There is nothing concrete, but we are talking to other partners that would give us access to the English-speaking market, the world's first market followed by the Spanish one," Berlusconi told the paper.
Mediaset's advertising business has been hit by a long recession, while Mediaset Premium has grappled with fierce competition from rival Sky Italia, a unit of Rupert Murdoch's 21st Century Fox.
"We are dealing with global competitors, full of resources, which are very aggressive and ruthless," Berlusconi told the paper, adding that the company will need the international alliances to remain competitive.
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