NEW YORK - U.S. mobile phone maker Motorola Inc's (MOT.N) set-top box unit has generated a lot of private equity interest, with a number of major buyout firms putting in initial bids this week, several sources familiar with the matter said.

Motorola is exploring a potential sale of its television set-top box and wireless networking equipment business, sources told Reuters last month. Called home and networks mobility, the unit had $10.1 billion in 2008 sales.

The first round expressions of interest, due on Wednesday, came from private equity firms including Bain Capital, TPG Capital TPG.UL, Blackstone Group LP (BX.N), KKR KKR.UL and Silver Lake Partners, the sources said.

Companies such as Arris Group Inc (ARRS.O), a communications equipment maker, could also be interested in the unit, although they are likelier to team up with private equity firms than go it alone, two of the sources said. It is unclear whether Arris put in an offer.

The bids are very early stage, some of the sources cautioned. The first round was for preliminary nonbinding indications of interest, one source said.

Motorola did not allow potential bidders to make joint offers in the first round, two of the sources said.

Silver Lake, Blackstone, TPG, KKR, Bain, Motorola and Arris all declined to comment.

Last month, one of the sources said that Motorola, which also plans to spin off its mobile phones business into a separate entity, may decide to keep the set-top box unit in the end.

The auction has been going slowly and is expected to run into the first few months of 2010 before a final bid date is set, some of the sources said.

Motorola's advisers, including Goldman Sachs (GS.N) and JPMorgan (JPM.N), have sent out the sales prospectus to dozens of potential buyers, one of the sources said.

In recent weeks, Motorola's management has also made presentations to potential buyers about the unit's performance, including Arris, two of the sources said.

On December 1, Motorola said it expected operating earnings for its set-top box business to grow in 2010, even if recovery in the housing market is subdued.

Motorola shares, which were up about 5 percent, rose another 1 percent on the news.

STRUGGLES AT MOTOROLA

Once a technology giant whose equipment Neil Armstrong used to transmit from the moon, Motorola has had flagging sales at its business units.

It plans to spin off its mobile phones business, which has not produced a hit device since the Razr. But Motorola's newest smartphone, Droid, based on Google Inc's (GOOG.O) operating system, has generated positive reviews and buzz.

Motorola's home and networks mobility division houses the set-top box unit. Along with Cisco Systems Inc (CSCO.O), which bought set-top box maker Scientific Atlanta in 2006, Motorola is the main player in the U.S. market.

Today, set-top boxes are the dominant technology through which people have access to television channels. But as new technology allows people to find other ways to get content, these boxes, rented to customers by cable operators, could become outmoded, some analysts have said.

Maybe Motorola is looking at that and thinking eventually the business is going to shift away from the cable providers to a more retail model, said Forrester Group analyst Charles Golvin. I think there will be a range of different devices and things that connect to TVs to deliver content.

The business, which is yesterday's technology but still generates strong cash flow, therefore makes sense for a private equity buyer, one of the sources said.

But this person said that private equity firms are likely to bid at a multiple of around six to seven times the unit's earnings before interest, taxes, depreciation and amortization (EBITDA), valuing it at no more than $4 billion. Under financing structures being discussed, private equity offers could be 50 percent equity-financed and 50 percent debt-financed, that person and another source said.

One of the first-round bidders, Bain Capital, bought Contec Holdings, a provider of cable set-top box repair services, in 2008 from American Capital.

The buyout firms may also partner with communications equipment companies to make a play for the Motorola unit, some of the sources said.

Suwanee, Georgia-based Arris, with a market value of $1.3 billion, is bullish on U.S. broadband networks, and the Motorola unit could tie in nicely with its plans for growth.

(Reporting by Megan Davies and Anupreeta Das, additional reporting by Sinead Carew)

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