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UPDATE 4-Harley-Davidson shares gain on takeover talk

* Harley declines to comment on market talk

* KKR named as potential bidder, has no comment

* Some analysts skeptical, see short-covering

* Shares up 6 percent (Adds analyst comment, background, CHICAGO to dateline, updates shares)

By Nick Zieminski and James B. Kelleher

NEW YORK/CHICAGO, March 16 (Reuters) - Harley-Davidson Inc HOG.N shares jumped 6 percent on Tuesday to their highest level in more than four months, lifted by speculation the motorcycle maker could be the target of a leveraged buyout.

Harley refused to comment on the market talk of a looming deal, which at least one analyst dismissed as “highly unlikely.”

But the speculation sent the company’s shares higher and they were up $1.59, or 6 percent, at $28.10 in afternoon trading on the New York Stock Exchange, where they were among the most actively traded issues.

Interest in Harley-Davidson options was also unusually active, with traders focused on short-term March call options with strikes between $25 and $28 and the April $28 and $30 calls, according to WhatsTrading.com options strategist Frederic Ruffy.

The March options expire on Friday after the close.

But volatility in the options was also “hot,” according to Jon Najarian, the co-founder of optionMonster.com, indicating “fear as well as short-covering”

Short interest in Harley shares is 15 percent, according to Najarian.

The speculation started early, with traders in Frankfurt citing market talk that the private equity firm Kohlberg Kravis Roberts was a potential bidder for the company -- talk KKR declined to knock down.

“We don’t comment on deal speculation,” a KKR [KKR.UL] spokesman said.

PRIVATE EQUITY BUYER?

But Peter Zuger, manager of the Touchstone Mid Cap Value Fund, which owns Harley shares, said he was somewhat leery of the speculation and took advantage of Tuesday’s surge to pare his holdings in the company.

“There’s been a rumor a day among a lot of value names for the last week,” he said. “I don’t know which ones are real and which ones aren’t.

“It would make sense (for a private equity buyer) at this point in the cycle because the business is depressed. If the private equity buyer believes we’re going to have a recovery and if the cost-cutting they’ve implemented comes to fruition, you might have a pretty good combination.”

The March calls, allowing investors to buy Harley shares at $27 by this Friday, and the April $30 calls are trading briskly, said Jud Pyle, chief investment strategist at Options News Network, a division of option market-making firm PEAK6 Investments.

"Just like many other stocks in the last few weeks, Harley-Davidson is popping on LBO rumors. On Friday it was Supervalu SVU.N, today it is Harley," Pyle said.

Tim Conder, the managing director of leisure equity research at Wells Fargo Securities, downplayed the likelihood of a buyout, saying Harley’s management team “remained highly focused on executing the restructuring of the company,” a process that has included laying off thousands of workers and consolidating production.

“If anything is potentially developing near-term,” Conder said, “we believe it could be the company forging a joint venture or fee type of arrangement with a depository institution partner” for its in-house finance unit. (Additional Reporting by Angela Moon, Chris Steitz, Megan Davies and Doris Frankel; Editing by John Wallace and Maureen Bavdek)

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