UPDATE 1-Novell nearing sale, says report; shares rise

(Adds analyst comment, background, details, update share move)

BANGALORE, Sept 15 (Reuters) - Shares of Novell Inc NOVL.O rose more than 6 percent after the New York Post reported the business software maker is three to four weeks away from signing a deal to sell itself.

The paper said the world’s No. 2 maker of the open source Linux operating system will sell itself in two parts, citing unnamed sources close to the deal.

The report said a strategic buyer will acquire the company’s Linux business and a private-equity firm will buy the remaining.

“We believe that Novell is of interest to a multitude of parties both strategic and financial,” Brad Zelnick, an analyst at Macquarie Research told Reuters.

He said Novell’s Linux business was the most strategic asset in its portfolio and would be attractive to any company looking to boost its virtualization capabilities.

Zelnick added that the Linux business could be of interest to Novell's biggest rival Red Hat Inc RHT.N, tech giant Oracle ORCL.O, data storage company EMC Corp EMC.N and/or to VMware Inc VMW.N, the virtualization pioneer that EMC partly owns.

Novell has partnerships with VMware and another virtualization company Citrix Systems Inc CTXS.O, providing interoperability between each other's products and joint technical support to customers.

Earlier this year, investment fund Elliott Associates offered to buy the company for $2 billion, or $5.75 a share, but was rejected.

The company later said it was exploring a sale of itself, fueling speculation on how the sale would be conducted because of the company’s diverse businesses. [ID:nSGE62N0BY]

The remaining businesses could be bought by Elliott, or more probably by multiple sponsors including Elliott, Zelnick said.

New York Post said its sources would not say who the potential buyers were, but noted that proceeds from these deals would exceed the Elliott offer.

Zelnick, who has a price target of $7.50 on Novell’s stock, said the company would want to be well compensated for the pain of splitting itself up and could get an offer above $7 a share.

Assuming Zelnick’s target price and a little more than 350 million in outstanding shares, the company could demand about $2.6 billion from buyers -- a 35 percent premium to Tuesday’s close -- and a fair deal, according to Zelnick, who noted that Novell had been fully shopped.

Novell trades at 21 times expected forward earnings, a significant discount to the sector average of 69.

New York Post said the talks were at a sensitive stage and the deal might still fall apart, adding that both deals were expected to close simultaneously.

Novell said it had no comment to offer, when contacted by Reuters.

Shares of the Waltham, Massachusetts-based company were trading up 33 cents at $5.90 on Nasdaq. More than 12 million shares changed hands by midday trade -- more than four times its normal trading volume.

The company's shares have risen 17 percent since it first received Elliott's offer in March, while the S&P 1500 Systems Software Sub-Industry Index .15GSPSYSF has dropped 5 percent gains in the same period. (Reporting by Sayantani Ghosh in Bangalore; Editing by Roshni Menon, Vyas Mohan)