By James Topham and Emi Emoto
TOKYO (Reuters) - Japanese trading house Marubeni Corp is in advanced talks to cut Gavilon's energy business out of its planned takeover of the U.S. commodity merchant, two sources with direct knowledge of the deal said on Friday.
The move comes as Marubeni works to finalize a $5.6 billion acquisition, including debt, of Gavilon and its core agriculture business in a deal that would propel it into the top ranks of global grain traders and allow it to tap rising Chinese demand.
But sources say the Japanese firm has little interest in taking on Gavilon's mid-sized energy operation, which is focused on oil, gas, and renewable fuels.
"The interest was always in the grains, not the oil," one source with direct knowledge of the Gavilon deal said, speaking on condition of anonymity. The talks could conclude as early as next week, one source said.
Gavilon's energy business could now join a list of mid-sized energy traders that are up for sale, including HETCO, the trading arm of oil firm Hess Corp . Morgan Stanley has also looked at selling all or part of its energy-focused commodity division in the past year.
A Marubeni official declined to comment when asked about the plan to split the U.S. company. A spokesman for Gavilon in New York also declined to comment.
Omaha, Nebraska-based Gavilon's shareholders include investor George Soros, Dwight Anderson's Ospraie hedge fund, and Egypt's Orascom Construction Industries .
When Japan's fifth-biggest trading house by market value announced the deal last year it said it had no plans to break up Gavilon's operations. The Gavilon transaction was originally valued at $3.6 billion, plus $2 billion in debt.
Yet market participants had speculated the company could offload an energy business not central to its plans. The Japanese company already has experience trading oil and natural gas in the United States through its Mieco subsidiary, headquartered in Long Beach, California.
Mieco focuses on trading gasoline and diesel and other refined oil products in the United States, as well as natural gas. It also imports fuels from Canada and South Korea to Alaska and the Pacific Northwest, according to data from the U.S. Energy Information Administration.
In April, the Department of Energy authorized it to export and import natural gas to and from Canada.
The Gavilon deal has also become more costly for the Japanese firm, with the yen losing a fifth of its value against the dollar since the deal was first announced in May 2012.
China's watchdog conditionally approved the deal in late April following a lengthy review period that has delayed the closing.
It is not clear if excluding the energy business from the deal will reduce the final price.
Of Gavilon's $17.85 billion in 2011 annual sales, just $390 million came from its energy business. But the company owns 8.5 million barrels of crude oil storage capacity in the United States, including more than 4 million barrels of storage capacity at Cushing, Oklahoma, the delivery point for the benchmark U.S. crude oil futures contract.
It also has facilities that can hold more than 10 billion cubic feet of natural gas.
Those facilities could be attractive to rival traders or private equity firms looking to grab a slice of the North American energy boom.
Gavilon ranked 31st in volume of natural gas sales out of some 480 companies that reported sales to the U.S. Federal Energy Regulatory Commission (FERC) in 2012. Marubeni's Mieco subsidiary was number 53 on that list.
(Additional reporting by Aaron Sheldrick in Tokyo, David Sheppard, Jeanine Prezioso and Cezary Podkul in New York; editing by Jason Neely and Jim Marshall)