* Company says will seek equity fundraising
* Source says rights issue could launch within 3 weeks
* Shares fall 10 percent
(Adds rights issue comment, updates shares, details)
By Rhys Jones
LONDON, Oct 29 (Reuters) - British bus and rail operator National Express walked away from a possible merger with rival Stagecoach and will now focus on raising cash by selling shares to cut its debts.
Shares in National Express, which have risen by a third in the past quarter on persistent takeover speculation, tumbled 10 percent to 328 pence by 1200 GMT on Thursday. Stagecoach shares rose 1.6 percent at 147.2p.
National Express, which was approached by Stagecoach earlier this month, rejected an all-share offer because it feared a deal would not be executed by Christmas, when it faces 5 million pounds ($8.22 million) in penalty interest payments on its 977 million pounds debt pile.
The potential deal was valued at up to 2 billion pounds ($3.3 billion) by analysts.
Stagecoach said it was disappointed that National Express rebuffed what it called a "compelling strategic and financial proposition" with value for both sets of shareholders.
FOCUS ON FUNDRAISING
National Express said it would now press on with plans as soon as possible to raise cash by selling shares.
A source familiar with the situation said a fundraising of between 300 million and 350 million pounds could be ready within three weeks and that National Express was already canvassing shareholders.
National Express said it would make an announcement about the proposed share sale in November.
"It's a perfectly sensible move to execute the rights issue first and then consider strategic options from a position of greater strength," said analyst Douglas McNeill at brokerage Astaire.
"Stagecoach have had two bites at the cherry now and I'm sure they regard National Express's assets as attractive, but I'm not sure whether they will be back with a bid anytime soon."
If the fundraising is successful National Express' lenders will push back the maturity date of its 540 million euro debt facility from September 2010 to March 2011, allowing it to refinance its other 800 million pound credit facility.
Earlier this month previous suitors, Spain's Cosmen family and private equity partner CVC Capital Partners, pulled out of a deal.
Some analysts said a deal with Stagecoach could have been scuppered by regulatory hurdles.
The company warned last week that its full-year profit would be below last year.
Rival transport groups Go-Ahead and Arriva on Thursday reported growing revenues across their bus and rail operations but said they were cautious on 2010.
(Additional reporting by Jonathan Saul and Daisy Ku)
(Editing by Valerie Lee and David Holmes)