Spain's second-largest power utility Iberdrola moved to unwind its 3.27 per cent stake in Repsol yesterday with an 850 million euro ($760 million) bond exchangeable into the energy group's shares.

The Bilbao-based company has said recently it viewed the Repsol stake as a financial one rather than the strategic holding it acquired in May 1999, indicating that it could be preparing to sell.

Market sources told Reuters that Iberdrola was taking advantage of a stronger market for convertible debt by issuing what lead managers said was the first exchangeable by a Spanish company.

Iberdrola bought a 3.5 per cent stake in Repsol in 1999 for 83.7 billion pesetas, part of a strategic alliance for the development of joint gas and electricity projects.

But the alliance never really developed and several joint ventures such as the construction of a power plant in the Basque Country in the north of Spain have dissolved.

Iberdrola is issuing 740 million euros of bonds, with a so-called "greenshoe option" to issue bonds worth a further 110 million euros if there is sufficient investor demand.

The conversion price will be set at a 38-43 per cent premium to Repsol's share price, according to a statement issued by the banks arranging the issue.

U.S investment bank Morgan Stanley is the bookrunner, with Spain's BBVA and U.S investment bank Goldman Sachs the co-bookrunners on the issue.