(Corrects spelling of Metso in third paragraph from the end)
* Studying spin-off of pulp, paper and power unit
* Unit generated about 40 pct of group sales 2012
* Activist fund campaigned for spin-off since 2005
* Shares jump 11 pct, hit highest in 11 months
By Jussi Rosendahl
HELSINKI, March 25 (Reuters) - Finnish engineering company Metso Oyj is studying the possible spin-off of its pulp, paper and power (PPP) unit, saying the divestment could boost growth and sending its shares sharply higher.
The move marks the success of an eight-year campaign for change at Metso by activist investment fund Cevian Capital, which first bought a 4 percent stake in 2005 and increased its holding to 8.3 percent three months ago.
Shares in Metso were up 10.5 percent at 34.03 euros by 1458 GMT, likely giving Cevian a substantial profit on its stake, though it was not immediately clear what average price it had paid. The stock rose as high as 34.93 euros, its highest since April 2012.
The PPP unit, whose products include paper machines and power plants, generated about 40 percent of Metso's net sales of 7.5 billion euros ($9.8 billion) last year. But its performance has been dogged by a downturn in paper demand.
Metso, which last month posted a 3 percent drop in underlying core earnings to 196 million euros, said the demerger would help accelerate growth in both the new company and the remaining units, Mining and Construction and Automation.
"Clearer business structures would increase the focus and ambition of the two companies with distinct growth strategies," said board chairman Jukka Viinanen in a statement.
The paper machine business, which makes about half of its sales of the unit being spun off, has been hit by a decline in magazines and newspapers as consumers switch to digital devices.
Last year Metso slashed some 500 jobs from its Finnish paper units, while the PPP unit overall ended last year with an operating margin of 4.9 percent, compared with about 11 percent at Metso's two other units.
Analysts were positive on the demerger.
"It is a good move. The PPP business is of a size that would operate well as an independent company," said Juha Kinnunen, head of research at Inderes Equity Research. "It is true that the outlook for the paper machine business is weak in the long term, but the unit is nevertheless in a pretty good shape."
The new company would be listed on the Helsinki bourse before the end of this year after a spinoff which has already won the support of Metso's main owners, Finnish state investment arm Solidium and Finnish pension funds as well as Cevian.
Cevian managing partner and Metso board member Christer Gardell had first proposed a split in 2005, soon after the fund acquired a 4 percent stake in the company, but the group's other owners had rejected the idea.
Investors had recently been speculating of a conflict between Cevian and the state owners who are more accommodating of perceived longer-term national agendas.
Some private investors were unhappy with Metso's decision in September to cancel an extra dividend following job cuts, which was seen as a politically-driven move to appease criticism from union leaders and government officials.
Cevian declined to comment on Monday.
Solidium, the biggest owner in Metso with a stake of 11.1 percent, said the spin-off did not make sense when it was first proposed. "Now, the businesses have matured. The company looks pretty different than in 2006," Solidium managing director Kari Jarvinen told Reuters.
Metso shares have been trading on a multiple of 6.2 times in terms of enterprise value against core earnings, pricing it at a 31 percent discount to peers on an average multiple of 8.9 times, according to Thomson Reuters StarMine.
Morgan Stanley said in a note to clients that the market may have been too pessimistic on the paper business. "Although graphic paper demand is falling in Europe and North America, tissue and containerboard keeps growing," its analysts wrote.
Under the demerger plan, Metso's owners will receive shares in the new company in proportion to their stakes in the group. The move would be sealed at a shareholder meeting during the second half of this year.
Cevian, which recently raised its stake in Denmark's Danske Bank, is also a shareholder in companies including truck maker Volvo.
Cevian says on its website it has more than 6 billion euros under management and describes its strategy as to invest in companies where there is a "meaningful opportunity to enhance ... long-term value by improving corporate governance, operational performance, corporate strategy and structure." ($1 = 0.7694 euros) (Editing by David Holmes)