UPDATE 2-ACS seen raising Iberdrola stake, cutting debt

(Updates with analyst, asset manager comments)

By Judy MacInnes

Madrid, July 31 (Reuters) - Spain's ACS (ACS.MC) made a 1.9 billion euro ($2.97 billion) capital gain on the sale of its holding in Union Fenosa (UNF.MC), which analysts expect it to use to lift its stake in utility Iberdrola (IBE.MC) and cut debt.

Construction company ACS said on Thursday total net returns from the 45.3 percent stake in Fenosa, including dividends received since September 2005, were 2.8 billion euros.

"I see ACS definitely upping its presence in Iberdrola, although my feeling is its priority is to use the cash pile from the Fenosa disposal to cut debt," given the current tight credit conditions, said a US asset manager who asked not to be named. ACS owns about 12 percent of Iberdrola.

Fortis analysts said they expect ACS initially to execute the equity swaps it has on about 5.1 percent of Iberdrola at the agreed price of 9.1 euros per share and then progressively increase its holding to 15 percent.

Gas Natural (GAS.MC) agreed to buy ACS's stake in Fenosa for 18.33 euros per share in cash on Wednesday.

This represented a premium of around 50 percent to Fenosa's share price a couple of weeks before ACS announced plans to sell the shares and "consolidate" its position in Iberdrola.

"It's been a good move for ACS as Gas Natural has really paid through the roof for Fenosa in its third and, eventually successful, attempt to create a domestic energy champion," a Spanish analyst said.

"ACS can now cut its debt pile and also have some loose change to stake-build in Iberdrola," he said.

The asset manager said the Gas Natural-Fenosa deal "is another example of how much industrial companies are ready to pay for assets in Spain," following the battle for control in 2005 for Endesa (ELE.MC).

"Assets such as distribution and hydro, as well as renewables are much prized and Iberdrola has a great portfolio, particularly in renewables where it is expanding apace," he added.

But Iberdrola is expected to remain aloof to any overtures from ACS regarding a possible tie-up.

"Iberdrola is one of the best-managed utilities in Europe and I think chairman (Ignacio Sanchez) Galan will continue to flex muscle in terms of expansion and poison-pill measures to protect the company from any hostile takeover moves," an investment banking source who asked not to be named said.

On Thursday, ACS said total group debt reached 18.44 billion euros at the end of June, but that after the Fenosa stake sale is completed, pro-forma net debt will drop to 5.16 billion euros. (Reporting by Judy Macinnes; Editing by Erica Billingham)