DEALTALK-Malaysia's Tenaga seen as top contender in 1MDB power assets sale

(Repeats to additional clients; no changes to text)

* Chinese bidder drops out of race

* Tenaga seen clinching deal by year end-sources

* 1MDB at the centre of financial scandal

* 1MDB selling assets to pare down debt

By Praveen Menon and Yantoultra Ngui

KUALA LUMPUR, Oct 13 (Reuters) - Malaysian utility heavyweight Tenaga is inching towards a multi-billion dollar purchase of energy assets from 1MDB after a rival bidder dropped out, a deal that would bring welcome financial relief to the scandal-hit state fund.

Hong Kong-listed CGN Meiya Power Holidings Co, the only firm beyond Tenaga to have openly expressed an interest for some 1MDB assets, said in regulatory filings on Friday it was no longer considering the transaction.

Other companies that had been initially short listed for the asset sale are not expected to bid before an end of week deadline, leaving the field open for the Malaysian suitor, bankers and sources close to the situation told Reuters.

Tenaga, 30-percent owned by Malaysian sovereign wealth fund Khazanah, has a strong chance to clinch a purchase by mid-November ahead of a final agreement in December, these people, who asked for anonymity as they are not authorised to speak to the media, said.

1MDB, currently at the centre of a political and financial scandal that is also embroiling Prime Minister Najib Razak, urgently needs to shed assets to pare back $11 billion of debt.

The negative headwinds from the scandal and the fund's perilous financial position may make it difficult for 1MDB to extract the 16 to 18 billion ringgit ($3.83 billion-$4.31 billion) it has earmarked for the sale.

"The negative sentiment around 1MDB hasn't fully abated as yet so to get market value for their power assets might be a challenge," said Weiwen Ng, an economist with ANZ.

1MDB, CGN Meiya and Tenaga declined to comment.

BACKTRACKING

The 1MDB assets had drawn initial interest from at least half a dozen suitors, including several from the Gulf.

But bankers say all these suitors appear to have quietly backtracked amid multiple investigations into 1MDB and allegations of financial mismanagement and graft - a major political challenge for premier Najib, who chairs the fund's advisory board.

The state fund will be likely dismantled after the sale of its power assets and real estate holdings.

Malaysian ownership laws state that foreign investors can only own up to 49 percent of domestic assets. This works in Tenaga's favour, the only local bidder, and may have discouraged foreign buyers who would be left without management control.

"No one but Tenaga can buy all of it due to the ownership laws. Besides, there would be no control premium in the deal. So valuations would be further depressed if 1MDB goes for a foreign investor," said a banking source aware of the discussions.

Shares of Tenaga slumped in July, after the company said it was interested in almost all of 1MDB's energy assets, with traders citing investor concerns the power company may overpay. ($1 = 4.1770 ringgit) (Additional reporting by Umesh Desai and Elzio Barreto; editing by Lisa Jucca)