French media and telecoms group Vivendi on Wednesday rejected what it said was a demand from shareholder Sebastian Holdings to break itself up, while denying the fund had made a bid approach worth over 40 billion euros ($51.2 billion).

Vivendi shares rose more than 5 percent on the news, which came as it posted a forecast-beating first-quarter underlying profit and raised its current-year forecast.

By 0940 GMT, its shares were up 4.63 percent at 29.08 euros.

A source close to Sebastian Holdings, an investment company linked to Norwegian investor Alexander Vik, told Reuters it had made an approach at 33.5 euros a share for the whole of Vivendi.

Following friendly discussions with them (Vivendi) and at their request we have submitted an offer of 33.5 euros a share, the source said on Wednesday.

In recent weeks Vivendi, which runs the world's largest record company Universal Music Group, has been subject to speculation it could sell the company in parts to unlock value as it traded at a discount to analysts' sum of the parts valuation.

Vivendi said in its results statement on Wednesday the board had rejected a request by Sebastian to dismantle, arguing it was based on unrealistic economic and legal hypotheses.

There has been an offer for the whole of the group...of more than 40 billion euros... It is difficult to understand how an offer to buy the group could be interpreted as a break-up offer, the source close to Sebastian said.

A spokesman for Vivendi told Reuters however: Vivendi denies having received an offer, it has received nothing firm and structured.

Sebastian Holdings, which owns more than 4 percent of Vivendi, declined to comment.

Vivendi had a market capitalization, based on Tuesday's market close, of 32.1 billion euros, of which more than half related to SFR, France's second largest mobile operator controlled through a 56 percent holding.

UNLOCKING VALUE

I think breaking up the group would make sense but where would Sebastian find 40 billion euros, said one Vivendi UK shareholder, who did not wish to be identified.

But there are probably a lot of private equity firms that would line themselves up for such a bid.

Last week, Vivendi's shares jumped on hopes British rival Vodafone -- which owns 44 percent of SFR -- could make a bid for the rest of the mobile operator.

Before Wednesday's rise, the stock was trading on a price to earnings ratio for the current year of about 16.5 times, which compared with a European media sector average of about 16 times and a European telecoms sector average of some 12 times.

The company had been under pressure from major shareholders to break it up and realize its value because people think that its break-up value is around 35 to 40 euros a share as opposed to it trading at a discount now, one trader said.

FORECAST-BEATING RESULTS

Vivendi posted earnings before interest and tax from operations of 990 million euros ($1.27 billion) in the three months to March 31.

This compared with an average forecast of 950.4 million euros from a Reuters poll of 10 analysts, and 921 million euros for the year-ago period, adjusted for disposals.

The group raised its 2006 net adjusted profit growth forecast to 16 percent, or 2.4 billion euros, from a previous growth forecast of 11 to 13 percent.

Vivendi also said it expected its net adjusted income to reach 3.5 billion to 4 billion euros by 2011, based on the assumption that all deferred tax assets would have been used by that date.

The group posted a first-quarter net adjusted profit of 592 million euros, up from 530 million euros last year.

Good results, four percent above my estimates at the net income level, we're quite pleased to see the long term guidance. This means the management is confident on the future and that they also want to convince us that their strategy is a good one, said Bruno Hareng at ING bank.

(Additional reporting by Sophie Hares and Anshuman Daga in London and Marie Maitre in Paris)

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