UPDATE 2-Finnish engineer Valmet to buy rest of valve maker Neles

* Valmet to buy Neles from shareholders at a premium of 16.4%

* Neles’ shares up 7.25%, Valmet’s down 5.79%

* Takeover estimated to be completed on Jan. 1, 2022 (Adds analyst comments, details on share reactions)

HELSINKI, July 2 (Reuters) - Finnish engineering firm Valmet said it will take full ownership of Neles on Friday, triggering a rise of nearly 13% in the Finnish valve maker’s shares and a drop of 7% for Valmet.

Valmet began raising its stake in Neles in 2020 after a bid by Alfa Laval, which was later dropped after the Swedish firm failed to get shareholder approval.

Valmet said it has secured support from shareholders representing 45% of shares in Neles and now plans to buy the 70% of Neles it does not already own at 14.22 euros per share, a premium of 16.4% to Thursday’s closing price.

“Neles’ share reaction reflects the premium and confidence in the merger most likely going through in general meetings and regulatory approval,” analyst Antti Viljakainen from Inderes told Reuters.

Valmet’s share price was down 5.79% at 35.11 euros and Neles up 7.25% at 13.1 euros at 0922 GMT, having jumped nearly 13% in early trading.

“Valmet’s share reaction reflects the market being a bit frayed by the high price given to Neles’ shares and doubtful about Valmet deviating outside of their core business with such an expensive purchase,” Viljakainen said.

The proposed takeover, which requires regulatory and shareholder approval, would see Neles shareholders get 0.3277 shares in the combined company for each one they hold.

Valmet’s shares were down more than 5% on news of the deal, which the companies said in a statement they expect to complete on Jan. 1, 2022 to create an entity with a revenue of 4.3 billion euros ($5.1 billion) and 17,000 employees.

The combined market value of the two companies was 7.43 billion euros before the market opened on Friday, with Neles accounting for 1.84 billion euros.

Valmet’s largest shareholder, the Finnish government’s investment company Solidium, said it supported the planned takeover and added it would own 9.1% of the new entity.

$1 = 0.8448 euros Reporting by Essi Lehto Editing by Alexander Smith and David Evans