* M&S shares rise 9.4 pct, 12-month high
* Qatar Holding not planning a bid for M&S - source
* Analysts, investors say bid a possibility
By Dinesh Nair and James Davey
DUBAI/LONDON, March 18 (Reuters) - Marks & Spencer shares surged on Monday on speculation that a faltering turnaround effort and flagging profits have left Britain's biggest clothing retailer vulnerable to a takeover.
Investors piled into the stock after a newspaper reported that the Gulf state of Qatar was planning a bid, sending the shares up 9.4 percent to a 12-month high. A source close to state-owned Qatar Holding denied the report, but the stock was still up 7.4 percent at 1130 GMT.
Analysts and investors said Marks & Spencer (M&S) could be a target for a private equity firm.
The company, which also sells homewares and food, traded poorly in 2012 and in January reported a bigger-than-expected drop in non-food like-for-like sales for the Christmas quarter.
"M&S is vulnerable to a bid, as trading and profits are under pressure, with nothing to show yet for the big investments made in online systems and warehousing and the changes in the clothing team," said independent retail analyst Nick Bubb.
M&S declined to comment.
Marc Bolland, chief executive since 2010, has said he was confident steps being taken by a new general merchandise management team, led by former food boss John Dixon, would address the poor recent performance, although the impact would not be felt until autumn/winter collections hit the shops in July.
M&S investors such as Standard Life, which holds 1.5 percent of the company, have said Bolland has to get this range right to placate shareholders.
Although one senior retail banker gave the probability of a takeover at just 5 percent, some analysts said a recent improvement in the debt markets and the amount of cash currently in private equity meant a bid could happen.
"You could argue that the business could support quite a bit of debt if it wasn't having to pay a dividend, making a private equity-style bid possible, but the trading outlook looks rather uncertain," one of M&S's top 20 shareholders told Reuters.
The Sunday Times newspaper had said the Qatar Investment Authority wanted to assemble a consortium to mount an 8-billion-pound ($12.1 billion) takeover.
The newspaper cited senior City of London sources as saying Qatar, which is already a 26 percent shareholder in Britain's No. 3 grocer J Sainsbury, had approached several large private equity houses, including CVC Capital Partners, to gauge their interest in participating, and had spoken to lenders about financing an offer. CVC declined to comment.
A source close to the fund told Reuters that Qatar Holding, the investment arm of the Gulf state's sovereign wealth fund, was not considering a bid.
With an investment appetite of about $30 billion every year, Qatar has emerged as one of the world's most aggressive investors, piling on stakes in companies ranging from top-tier banks such as Credit Suisse to carmaker Porsche and miner Xstrata.
The sovereign fund's investments are widely seen as opportunistic, not following a specific strategy, as it has purchased a wide range of assets globally. It likes to engage in bilateral discussions with the seller and generally does not invest in a consortium.
Shares in M&S were up 27.5 pence at 400 pence at 1130 GMT, valuing the business at 6.45 billion pounds. However, its bonds weakened sharply and the cost of protecting its debt against default rose.
In 2004 the retailer fought off a 9.1 billion-pound bid approach from Topshop owner Philip Green.
There are many obstacles to a deal now.
M&S was arguably in a worse state in 2004 than today and the environment was less competitive with, for example, rival Primark yet to become the force it is now.
At the end of September 2012 M&S had net debt of 1.86 billion pounds, and as of March 2012 had a pension deficit of 290 million pounds.
While its property, last valued in 2004 at 3.6 billion pounds, could be attractive to private equity, the situation is complicated by the retailer's pension scheme being part funded by income from a portion of its property portfolio.
"Some of the premium freehold sites would be attractive, but 1.5 billion pounds is tied up in the pension partnership and we believe there is a long tail of unattractive high street and suburban sites," said analysts at Credit Suisse.
They say long-term institutional shareholders and M&S's army of private investors would require a significant premium, having seen the shares below 4 pounds for most of the past decade, while the pension fund trustees could also demand additional funding.