Vivendi agrees purchase of Mediaset's pay-TV business

* Deal agreed on Friday, includes 3.5 percent share swap

* Agreement secures Berlusconi as Bollore (LSE: 0IXZ.L - news) ally

* Analysts see scope for broader deal at later stage (Recasts with announcement, quotes, analyst)

By Giancarlo Navach and Giulia Segreti

MILAN/PARIS, April 8 (Reuters) - French media group Vivendi (Swiss: VIV.SW - news) agreed on Friday to buy the pay-TV operation of Italian broadcaster Mediaset (LSE: 0NE1.L - news) , completing a major step in billionaire businessman Vincent Bollore's plan to build a southern European content and video-on-demand powerhouse.

The share-based deal values Mediaset Premium at 800 million euros ($912 million), with the two companies taking a 3.5 percent stake in each other.

It (Other OTC: ITGL - news) also secures Italian tycoon and former prime minister Silvio Berlusconi, Mediaset's largest shareholder, as an important ally for Bollore as he develops his ambition to compete with Rupert Murdoch's Sky (LSE: BSY.L - news) and video-streaming giant Netflix (Xetra: 552484 - news) .

Bollore has been accumulating strategic assets in Italy, including a 24.9 percent stake in Telecom Italia (Other OTC: TIAJF - news) , and Vivendi (LSE: 0IIF.L - news) says it wants to make further investments in southern Europe, where pay-TV penetration is relatively low.

"One of the main points of this deal is the creation of a new company which has the ambition of creating international content for distribution on all platforms," Berlusconi's son Pier Silvio, who is Mediaset's CEO, told reporters.

The Vivendi board had already given the green light to a deal with Mediaset some time ago, two sources said.

Under the agreement, Vivendi will acquire Mediaset's 89 percent stake in Mediaset Premium and the remaining 11 percent stake held by Spanish group Telefonica (Amsterdam: TA6.AS - news) .

Mediaset shares rose 5.4 percent to close at 3.50 euros while Vivendi was up 0.85 percent at 18.42 euros.

BROADER ALLIANCE?

Loss-making Mediaset Premium has 2 million subscribers, many of whom are drawn to its sports channels.

In 2014 it bought exclusive rights to broadcast Champions League soccer matches in Italy for an estimated 700 million euros, stretching its cost base but giving it an advantage over Sky.

The Italian company's top management has worked to strike a deal quickly, before viewership drops off after the Champions League final in May, according to one industry analyst.

Analysts said the deal could lead to Vivendi raising its stake in Mediaset further down the line to tighten its grip on the company's free-to-air services.

"Vivendi has been looking to increase its presence in the French TV advertising market and buying Mediaset would not only give it a presence in the Italian TV advertising market but also in Spain, given Mediaset's majority stake in Mediaset Espana (Amsterdam: MW8.AS - news) ," broker Liberum said in a note.

The deal envisages a three-year lock-up period, during which Vivendi will not be able to increase its stake in Mediaset (Amsterdam: MA8.AS - news) beyond 5 percent. Pier Silvio Berlusconi said the accord was not a prelude to his family exiting its media businesses, which includes publishing house Mondadori.

Vivendi Chief Executive Arnaud de Puyfontaine, in an interview with Italian financial daily Sole 24 Ore on Friday, said Vivendi's plan was to build a Latin media group with key partners in the telecoms sector.

"We believe that a tighter relation between telecoms and our world -- where competition comes from Google, Facebook and Netflix (Hanover: NFC.HA - news) -- is the right way to success," he said.

Vivendi, owner of Canal Plus (Paris: FR0000125460 - news) , has also considered buying Murdoch's European pay-TV group Sky, sources told Reuters last year, though sector analysts have said this would be too much of a stretch for Bollore.

For Berlusconi, the deal improves the Milan-based broadcaster's financial stability and leaves it with a continued role in Europe's pay-TV sector as a shareholder in Vivendi.

"Mediaset becomes the second-biggest private investor in what was already the leading media company in Europe," Pier Silvio Berlusconi said.

($1 = 0.8772 euros) (Additional reporting by Elvira Pollina and Claudia Cristoferi in Milan, Gwenaelle Barzic in Paris; Writing by Silvia Aloisi; Editing by Keith Weir and David Goodman)