UPDATE 1-Eurazeo sells bonds exchangeable for Danone stock

* Eurazeo to subscribe to Danone rights issue

* Five-year bonds to finance new investment opportunities

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PARIS, May 28 (Reuters) - French investment company Eurazeo (EURA.PA) plans to sell bonds worth up to 690 million euros ($962 million) exchangeable into existing shares in food group Danone (DANO.PA) to fund new investments.

Eurazeo will also subscribe to the planned 3 billion-euro rights issue announced by Danone earlier this week, subject to the final terms of the share sale, it said in a statement on Thursday.

The bonds will enable Eurazeo to take advantage of new investment opportunities arising in the economic downturn and help it partially refinance existing indebtedness relating to its holding of some 5 percent in Danone, Eurazeo said.

Eurazeo is offering bonds worth around 500 million euros, with an option to increase the issue by a fifth. This amount would rise further if an over-allotment option granted to lead managers BNP Paribas and Calyon is exercised.

The issue initially represents two-fifths of Eurazeo's Danone stake, Eurazeo said.

"This transaction will allow Eurazeo to benefit from the upside potential in the Danone share price, up to the issue premium, over a five-year period," Eurazeo said. "Eurazeo reaffirms its confidence in Danone's future prospects."

Danone, the world's biggest yoghurt maker and owner of Evian bottled water, said this week it planned to launch a rights issue in the coming days to help cut its net debt and fund small and mid-sized acquisitions. [ID:nLQ661838]

Eurazeo said the nominal value of the five-year bonds would reflect an issue premium of 25 to 30 percent over Danone's share price. The annual interest rate on the bonds would be between 5.75 and 6.50 percent.

Danone shares were down 2.7 percent at 36.095 euros by 0744 GMT. Eurazeo stock was 0.5 percent higher at 33.17 euros. ($1=.7172 Euro) (Reporting by James Regan; Editing by Hans Peters)