* Deal values BMG at 1.1 bln eur incl debt - Bertelsmann CEO
* Bertelsmann pays 700-800 mln euros including debt-source
* KKR roughly doubles its investment - source
* Bertelsmann looking for further acquisitions
By Ludwig Burger and Nikola Rotscheroth
FRANKFURT, March 1 Bertelsmann AG, Europe's largest media company, is buying out its partner in music rights company BMG, banking on pop fans splashing out on more digital downloads.
The German group, best known for its TV arm RTL and publisher Random House, said the purchase of the 51 percent stake from private equity group KKR & Co LP valued BMG at 1.1 billion euros ($1.4 billion), including debt.
A person familiar with the matter said the purchase price was between 700 and 800 million euros, also including debt.
Bertelsmann is trying to expand into digital content and into emerging markets to complement its ailing print publishing business, where it is planning a merger with Pearson Plc's Penguin imprint.
BMG oversees the fees from radio stations and advertising companies as well as the key growth area of online music shops. It manages the rights to more than a million songs, including works by artists like Bruno Mars, Johnny Cash and Will.i.am.
"The use of music has never been as high as it is today, not least because of the streaming technology. This (BMG) is a business with robust growth potential," Chief Executive Thomas Rabe told Reuters.
He pointed to the recording industry reversing a decline which began in 1999 because of digital copying and file sharing. Online marketing platforms like Apple Inc's iTunes were taking hold and were expanding in emerging markets such as Russia, further shoring up BMG's business, Rabe added.
The deal, funded out of the media group's cash reserves, would close during the first half of the year, Bertelsmann said, declinding to disclose more financial terms.
Rabe said that while BMG would look for smaller and medium-sized takeover targets, it would not need an alliance partner.
"We are happy to have BMG back with us entirely," Rabe said.
BMG had lost out in 2011 to rival bidder Universal Music Group, part of Vivendi SA, when music rights group EMI Group Ltd was put up for sale.
KKR roughly doubled its investment, cashing in between 350 and 400 million euros for its stake, the source close to the deal said. KKR initially invested 50 million euros in BMG in 2009 and later upped the investment to 209 million.
On an annualized basis, KKR's return - or so-called internal rate of return (IRR) - was above the 20 percent threshold private equity investors usually seek when buying and selling companies.
The BMG sale is KKR's second media divestment in roughly two weeks. In mid-February, KKR and peer Permira raised 485 million euros in the sale of shares in German broadcaster ProSiebenSat.1, the first step towards their complete exit from the media group.
Bertelsmann's Rabe said in September he planned major acquisitions and strategic partnerships to accelerate growth in a bid to become more international and a leading digital company.
Music rights companies as well as educational and scientific book groups are among potential targets, Bertelsmann has said. The group is also seen as a possible buyer for German speciality publisher Springer Science+Business Media, owned by private equity firms EQT and GIC.
Bertelsmann is planning to pay for its acquisition spree by selling shares in broadcasting group RTL Group.
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