UPDATE 2-Israel's ECI Telecom may be bought for over $1 bln

(Adds analyst comments, capital gains, background)

By Tova Cohen

TEL AVIV, June 17 (Reuters) - Israeli telecom equipment maker ECI Telecom ECIL.O said on Sunday it was in talks with a group of investors led by Swarth Investments regarding a potential acquisition of ECI for $10 per share in cash.

ECI has about 118 million shares outstanding, which would make the deal worth $1.18 billion. Its shares closed at $8.92 on Nasdaq on Friday, up 3.8 percent.

Swarth is an investment vehicle controlled by telecom businessman Shaul Shani.

Daniel Meron, an analyst at RBC Capital Markets, said he believed $10 a share was a fair price for ECI.

"I don't think there will be a competing bid, given the tepid business momentum and lack of strategic differentiation regarding its pipeline," Meron said.

He rates ECI as "sector perform" with a $9 price target.

ECI's sales in the first quarter fell to $155 million from $162 million a year earlier, though earnings excluding one-time items rose to $9.7 million, or 8 cents a share, from $7.1 million, or 6 cents a share, a year earlier.

The company comprises two divisions after a major restructuring in recent years -- telecom and data networking equipment and broadband access equipment.

The broadband division is dependent on two main customers -- Deutsche Telekom (DTEGn.DE) and France Telecom (FTE.PA) -- which cut back on their purchases in 2006, though ECI has said business was climbing back this year.

In an effort to expand to the United States, ECI recently forged a deal with Motorola (MOT.N), the No. 2 maker of cell phones, to sell ECI's broadband network products.

ECI is 28 percent held by Israeli holding company Koor Industries (KOR.TA) KOR.N. Koor estimated that if a deal were completed at $10 a share, it would post a capital gain of 598 million shekels ($143.2 million).

"There can be no assurance at this stage as to whether this transaction will be consummated, and if consummated what the actual consideration would be," ECI said in a statement.

Any deal would be subject to regulatory and other customary approvals and conditions.

"ECI does not intend to make any further comment, or respond to any inquiries, until a binding agreement, if any, is reached with respect to a purchase, or talks have been terminated," the statement said.

Holding company IDB Development Corp. IDBD.TA, together with its investment unit Discount Investment Corp. (DISI.TA), acquired 52 percent of Koor last year.

IDB Development IOBD.TA said it would post a gain of 150 million shekels, and its parent company IDB Holding Corp. (IDBH.TA) would post a gain of 110 million shekels if the sale went ahead.

Discount, however, which owns 42 percent of Koor, said it would post a loss of 35 million shekels.

Clal Industries (CII.TA), another IDB subsidiary, owns 13 percent of ECI. It said it would post a gain of 277 million shekels from the sale. ($1 = 4.175 shekels)