UPDATE 3-Investor group sweetens bid for Aeromexico airline

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MEXICO CITY, Oct 12 (Reuters) - Citigroup and its Mexican investment partners sweetened their offer on Friday for airline Aeromexico, the object of a bidding war, by offering warrants in additional to its original $160 million bid.

The warrants offered by the investor group would pay out 10 percent of the increased value in Aeromexico AMEXICOA.MX from when it is acquired until it is eventually floated in a stock market offer.

On Thursday, Mexico's competition watchdog rejected a $200 million bid by rival airline Mexicana for government-controlled Aeromexico, which has more than $1 billion in debt and is hamstrung by high labor costs and competition from discount carriers.

Mexico's Saba family, one of the country's wealthiest, has offered $166 million.

Banamex, Citigroup's (C.N: Quote, Profile, Research, Stock Buzz), Mexican unit, said the warrants would trade on the stock market and pay out when Aeromexico is relisted, within no more than three years.

Banamex reiterated an earlier pledge by the group to quickly invest $240 million to improve Aeromexico, which would directly benefit warrant holders.

"Through these instruments, selling shareholders will have a stake in the company's increased value without making any payment or taking any risk," Banamex said.

The Mexican government is trying to sell its 62 percent stake in Aeromexico and its holding company, Consorcio Aeromexico. Aeromexico and Mexicana were brought under government control after they went bankrupt in the mid-1990s.