By Paola Arosio and Danilo Masoni

MILAN (Reuters) - China National Chemical Corp (ChemChina) is to buy into Pirelli <PECI.MI>, the world's fifth-largest tire maker, in a 7.1 billion-euro ($7.7 billion) deal that will put the 143-year-old Italian company in Chinese hands.

The deal, agreed with Pirelli's top shareholders on Sunday, is the latest in a series of takeovers in Italy by cash-rich Chinese buyers taking advantage of a weak euro just as Europe is slowly emerging from economic stagnation.

The offer will be launched at 15 euros per share, valuing the Italian company at 7.1 billion euros excluding net debt of almost 1 billion euros at the end of 2014. ChemChina's tire making division envisages taking Pirelli private.

Shares in Pirelli, which hit a 25-year high last week, rose 5 percent above the offer price on Monday on expectations of a dividend payout before the deal is closed.

If successful, the deal will create a global leader with a market share of 10 percent, according to Swiss bank UBS.

It also represents the sale of another of Italy's industrial icons, after a string of deals in recent years in sectors from fashion to food to engineering to energy, as decades of stagnation have eroded the country's economic base.

"The sale of a prized piece of our industrial system like Pirelli to foreign buyers would not be a drama in itself if Italian capitalism were able to face up to international competition and the government had an industrial policy," the head of Italy's biggest union, Susanna Camusso said.

The deal will give state-owned ChemChina, led by acquisitive Chairman Ren Jianxin, access to technology to make premium tires which can be sold at higher margins and give the Italian firm a boost in the huge Chinese market.





CHINA RETURN

The bid for Pirelli marks a return of China's state-owned enterprises to global dealmaking, following a hiatus caused by President Xi Jinping's anti-graft crackdown that targeted several current and former senior officials at state companies.

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Italian Prime Minister Matteo Renzi has been uncharacteristically silent about the deal but his government has made no protectionist noises about ChemChina.

Under the deal, ChemChina's tire making division, China National Tire & Rubber, will first enter into a joint venture which will buy the 26.2 percent stake Italian holding firm Camfin owns in Pirelli. The venture will then launch a mandatory takeover bid for the rest of Pirelli, the companies said in a statement.

The bid will be launched by a vehicle controlled by the Chinese state-owned group and part-owned by Camfin investors, who include Pirelli boss Marco Tronchetti Provera, Italian banks UniCredit <CRDI.MI> and Intesa Sanpaolo <ISP.MI>, and Russia's Rosneft <ROSN.MM>.

Rosneft bought a 50 percent stake in Camfin a year ago, before the onset of the Russian economic crisis. The oil company will remain a Pirelli investor after the buyout but it is unclear at this stage what its final stake will be.

The new Chinese owners will pick a chairman. Tronchetti Provera, who started working at the tire maker in 1986 after marrying a member of the Italian family that founded Pirelli, will remain chief executive.





SWEETNER HOPES

Pirelli stock closed at 15.5 euros on Monday, a level which traders said prices in expectations of an ordinary dividend of 36 to 44 euro cents, which Pirelli has said it will pay before the buyout.

A fund manager who invests in Pirelli said while the deal made industrial sense there was scope for a sweetener that could be announced together with the ordinary dividend.

Giuseppe Puglisi, an analyst at Milan brokers Intermonte, said a special dividend of up to 1.5 euros "could placate the market" if it pushes for better terms. He said the offer did not fully reflect the long-term value of the company.

Because the deal has the backing of most of Pirelli's core investors, it is unlikely to fail or face a counterbid from a European rival such as France's Michelin <MICP.PA> or Germany's Continental <CONG.DE>, bankers said.

The agreement could help China develop its automotive industry further, while strengthening Pirelli's position against larger rivals such as Michelin and Continental which are looking for growth in Asia.

Camfin said on Sunday that Pirelli's less profitable truck and industrial tire business would be folded into ChemChina's listed unit AEOLUS <600469.SS>, allowing it to double its output.

While Pirelli's Italian management will stay on and the agreement gives Italian investors a veto on some decisions, there is little doubt who will call the shots, bankers said.

Pirelli sent a letter to assure workers the ownership changes would not impact jobs.

Previous Chinese acquisitions in Italy include stakes in power grid firms Terna <TRN.MI> and Snam <SRG.MI>, turbine maker Ansaldo and luxury yacht maker Ferretti [FRREF.UL].

Excluding the financial sector, Italy is the second-biggest acquisition market for China in Europe and fifth-largest worldwide, with 10 deals completed since the start of 2014, according to Thomson Reuters data.

Rothschild and ChemChina Finance Corp advised ChemChina. J.P. Morgan <JPM.N> advised China National Tire & Rubber, while Lazard was the financial adviser to Camfin.

($1 = 0.9221 euros)





(Additional reporting by Denny Thomas in Hong Kong, Chen Aizu in Beijing and Agnieszka Flak, Silvia Aloisi, Maria Pia Quaglia and Stefano Rebaudo in Milan; Writing by Danilo Masoni and Agnieszka Flak; Editing by Susan Thomas, Greg Mahlich and David Clarke)