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UPDATE 1-Disney close to investing more capital in HK - source

HONG KONG/LOS ANGELES, May 8 (Reuters) - The Walt Disney Co DIS.N is close to agreeing to invest more capital in Hong Kong Disneyland and allow the island's government convert its loans to equity to maintain its majority share of the theme park, a source involved in their talks said.

If Disney and Hong Kong’s government, which now owns 57 percent of the underperforming and much-maligned resort, can close a deal, it could pave the way for an expansion that is estimated to cost HK$3 billion ($387 million) and boost flagging attendance at the nearly four-year-old park.

The Hong Kong government put up the bulk of the estimated total investment of $3.6 billion to develop and build the 310-acre (126 hectare) resort at Penny’s Bay.

The source, who declined to be identified because the negotiations have not been made public, told Reuters however that Hong Kong’s government will not budge on two points: the need to retain equity control of the project, and a refusal to put up any more cash for the park.

“The Hong Kong government might reduce its holdings, but still retain a majority shareholding. That’s the bottomline,” said the source.

Top Disney executives met with Financial Secretary John Tsang in Los Angeles last week, triggering speculation that the two partners were close to hammering out an agreement after years of back-and-forth over China’s first Disney themepark.

Hong Kong officials and Disney executives have said their recent talks had broken fresh ground and they would announce details soon.

Disney spokeswoman Tasia Fillippatos had no comment, saying the No. 1 U.S. entertainment company is “not going to negotiate the deal through the press.”

Critics say the Hong Kong site is too small to attract the repeat visits that have made Disney’s other parks profitable.

Attendance has failed to reach initial bullish projections, despite the park’s proximity to mainland China, and the Chinese tourist market has since been hit by the economic crisis.

The proposed expansion plans would enlarge the park’s existing area by around a third, a source told Reuters and feature three new “lands” to complement the four existing ones.

Disney has also signed a framework agreement with authorities in Shanghai to build a park there.

Sources say that the Hong Kong government isn’t willing to surrender its controlling stake given pressure from the Hong Kong public, and especially the city’s legislators who have final say on whether to approve the deal. (Editing by Edwin Chan and Muralikumar Anantharaman)