Faroe Petroleum raises defences for possible DNO bid

* Faroe hires investment bank Rotschild

* DNO (LSE: 0MHP.L - news) seeking to raise new debt

By Ron Bousso and Shadia Nasralla

LONDON, May 3 (Reuters) - Faroe Petroleum (LSE: FPM.L - news) has hired investment bank Rothschild to prepare for a potential takeover bid by Norwegian oil company DNO, industry and banking sources said.

DNO has nearly doubled its stake in London-listed Faroe over the past month and said it has no intention to launch a full takeover bid, compelling it to refrain from crossing a 30 percent ownership threshold for at least six months. Once that threshold is breached it would be obliged to make a full offer.

But Faroe, which is developing a number of promising oil prospects in Norway, is expecting DNO to try to buy the company once the six-month moratorium expires, the sources said.

Faroe has hired Rothschild to prepare defences for a possible bid, which will include discussions with investors, three sources told Reuters.

Chief Executive Graham Stewart told Reuters that the company used Rotschild as defence advisers when Dana Petroleum acquired a 27.5 percent stake in the early 2000s. That stake was sold after Dana was acquired in 2010.

"We continued the defence relationship with Rothschild throughout," Stewart said.

Both DNO and Rothschild declined to comment.

DNO, which focuses largely on operations in Iraq's semi-autonomous Kurdish region, this week announced it was seeking to raise new debt.

"We believe DNO will take further action and fully acquire Faroe Petroleum as the current owner structure is fragmented among several large institutions and few private shareholders, but the timing is highly uncertain," Danske Bank (LSE: 0NVC.L - news) analyst Anders Torgrim Holte said in a note on April 16.

Faroe's share price has risen by about a third since DNO began its stake-building on April 4.

(Additional reporting by Nerijus Adomaitis in Oslo and Shadia Nasralla in London Editing by David Goodman)