UPDATE 3-Motorola eyes separating mobile division

(Adds analyst comment, details)

By Sinead Carew

NEW YORK, Jan 31 (Reuters) - Motorola Inc (MOT.N) said on Thursday it was considering separating its loss-making mobile phone unit, in an apparent concession to demands from activist investor Carl Icahn, sending its shares up 12.7 percent in after hours trade.

The world's third-largest mobile phone maker, which has been losing market share to market leader Nokia Corp (NOK1V.HE) and Samsung Electronics Co Ltd (005930.KS), said it was looking at a "structural and strategic realignment" to help it recapture market share and enhance shareholder value.

Options include spinning off or selling the phone division, which accounts for about half of revenue. Motorola also makes television set-top box and network equipment.

Potential suitor may include Korean rivals such as Samsung Electronics (005930.KS), which took the No. 2 mantle from Motorola in 2007, or No. 5 ranked LG Electronics (066570.KS). Chinese vendors Huawei [HWT.UL] or ZTE (0763.HK) may also be interested, analysts said.

A deal may also make sense for Sony Ericsson, owned by Sony Corp (6758.T) and Ericsson (ERICb.ST), according to analysts. Sony Ericsson has said it plans this year to boost its share in of U.S. market, where Motorola still leads.

Spinning off the phone unit may attract focused investors willing to pay a premium for that unit. Another argument is that the phone unit is dragging down the valuation of the rest of the business. Motorola has a market capitalization of about $26 billion, less than its 2007 revenue of $36.6 billion.

RBC analyst Mark Sue said it made sense for Motorola to look at unlocking shareholder value, but it most urgently needed to fix its mobile devices business.

"In the end, separation of a business entity doesn't really create value. The challenge still is to turn around the mobile device business," Sue said.

Motorola's handset revenue fell 33 percent last year to $19.0 billion, but still accounted for 52 percent of total sales. The unit made an operating loss of $1.2 billion last year, versus a 2006 profit of $2.7 billion.

Billionaire investor Carl Icahn, listed as Motorola's third biggest shareholder with a 3.3 percent stake as of September 30, has urged the handset maker to break up to increase value for its shareholders.

"For many months I have been publicly advocating the separation of Mobile Devices from Motorola's other business and I am pleased to see that Motorola is finally exploring that proposal," Icahn said in a statement on Thursday.

But he said he remained determined to nominate some directors to Motorola's board at this year's annual meeting. "We believe Motorola is finally moving in the right direction but certainly still has a long way to go," Icahn said.

Icahn had failed to win a seat on Motorola's board last year after a bitter proxy battle.

Motorola's share price has fallen more than 55 percent since its quarterly results started disappointing investors in October 2006.