* Sunrise to finance deal with 4.1 bln Sfr rights issue
* Swiss company aims to reverse UPC's 'negative trajectory'
* Sunrise deal a challenge to dominant Swisscom
* Sunrise shareholder Freenet says will skip cash call (Recasts after Freenet says it will skip cash call)
By John Revill and John Miller
Feb 27 (Reuters) - Sunrise Communications' $6.3 billion deal to buy U.S. cable giant Liberty Global's Swiss assets, announced on Thursday, immediately hit a snag as a key shareholder said it would shun a planned rights issue to finance the acquisition.
Sunrise said earlier on Thursday that it had agreed to buy UPC Switzerland from John Malone's Liberty Global and that it would finance the transaction with a $4.1 billion rights issue.
The acquisition will bolster Sunrise's position against Switzerland's dominant mobile and internet provider Swisscom and comes as Malone is cashing out of some of his European investments.
In a potential obstacle, however, Freenet, which owns a nearly 25 percent stake in Sunrise, said it would not participate in the rights issue, arguing that it saddles existing investors with all the risk.
Sunrise shares fell as much as 13 percent after the deal was announced as analysts predicted Freenet may not have the appetite for the rights issue and were down 10.3 percent by 1345 GMT.
Sunrise said it will pay Liberty Global around 2.7 billion Swiss francs in cash and assume 3.6 billion francs of UPC's debt.
Jefferies analyst Ulrich Rathe, who called the valuation of the deal "rational" given its potential synergies, said Freenet's opposition might not be a dealbreaker.
Shareholder approval was "not a foregone conclusion" given Freenet's stance. However, with only a simple majority of votes needed at an extraordinary shareholder meeting, opposition by Freenet may not be insurmountable, Rathe said.
Freenet, a German telecommunications and web content provider, concluded that Malone was getting too good a deal.
"Freenet AG will not participate in the capital increase," it said in a statement. "Regardless of the investment volume, the transaction design disturbs us. It releases the seller from all obligations and the risk is borne especially by the old shareholders."
UPC Switzerland's fixed and mobile services will help Sunrise go head-to-head with Swisscom. The UPC business has 1.1 million TV customers, albeit with falling subscriptions, and 138,000 mobile phone clients in Switzerland.
Sunrise said the deal gives it a chance to leverage its brand name and distribution network "to improve the current negative trajectory of UPC Switzerland by cross-selling fixed broadband and TV offers to existing Sunrise customers."
"We have all the ingredients to win," Sunrise Chief Executive Olaf Swantee said, adding job cuts were coming.
The company said the deal would create synergies of 2.8 billion francs, which analysts at Bank Vontobel called "considerably ahead of our estimate and provide the bulk of value creation potential".
For Malone, founder and chairman of Liberty Global, it marks more trimming of European assets including in Germany, Austria and eastern Europe, but not necessarily the end of his dealmaking as he deploys roughly $15 billion in proceeds.
Analysts said he may use the proceeds for more deals. Ameet Patel, at Northern Trust Capital Markets equity sales, saw two scenarios.
"First is a deal in the UK, where combining Virgin Media with O2 seems like a no-brainer on paper. That would create the opportunity to build a smartly-branded converged challenger to BT," he said.
Alternatively, Malone may just return the cash to shareholders, which could indicate he sees a structural challenge to cable from next-generation 5G telecoms networks.
Sunrise's Swantee said integration of Liberty's UPC Switzerland could cost up to 150 million francs and the deal would likely lead to a one-level credit rating cut.
The deal is expected to close in the second half of 2019 and add to Sunrise's equity free cash flow per share from the first year after that.
Credit Suisse, JPMorgan and LionTree served as financial advisers to Liberty Global, while Deutsche Bank, UBS and Morgan Stanley advised Sunrise.
$1 = 1.0014 Swiss francs Additional reporting by Ismail Shakil in Bengaluru, Angelika Gruber in Zurich, and Georgina Prodhan and Helen Reid in London; editing by Shri Navaratnam and Susan Fenton