* Offer raised 3% to A$16.50 per share
* Riversdale CEO sees institutional support growing for Rio offer
* Offer final if no competing bids
* Rio bid conditional on majority control
* Riversdale shares up 3.2 pct but below offer value (Recasts)
By Sonali Paul
MELBOURNE, March 10 (Reuters) - Rio Tinto raised its offer for coal miner Riversdale Mining with a final bid of $3.9 billion on Thursday, a move the target company said was helping to win over institutional shareholders.
Riversdale Chief Executive Steve Mallyon said momentum among institutions in support of the offer was building but he didn't know how the two biggest shareholders, India's Tata Steel and Brazil's CSN , would respond.
Without their support, Rio needs nearly full buy-in from the rest of the Africa-focused miner's shareholders for the bid to succeed, but up to now institutions have been reluctant to commit without knowing the two steelmakers' intentions.
"I can say that from the institutional calls that I've made in the last few hours that there's some growing support for Rio Tinto," Mallyon told Reuters.
"I think there's momentum building with the institutions, which is important in terms of convincing groups like Tata that Rio's going to be successful," he said.
Rio Tinto raised its bid by 3 percent to A$16.50 a share and extended the offer period for a third time, to April 1, but said the new offer was final if no rival bids emerged.
Riversdale's shares seesawed in a wide range after Rio raised its offer, closing up 3.2 percent at A$15.61. But that was still below the offer price, suggesting some doubts that Rio Tinto would be able to meet its condition of 50.1 percent in acceptances.
As of March 4, Rio Tinto only had acceptances on 17.9 percent of Riversdale's shares.
"The market's clearly a bit sceptical that it will get across the line," said Peter Chilton, analyst at Constellation Capital Management, which owns shares in Rio Tinto.
Riversdale reiterated it was not aware of anyone lining up a competing offer.
"I don't think there's anyone else out there despite all of the rumours. It's been well-tested since the bid was announced in mid-December," Mallyon said.
Tata Steel, the world's No. 7 steelmaker, and top Brazilian steel producer CSN have increased their stakes in Riversdale since the bid. Combined, they hold 47 percent.
NOT HOSTILE
Tata, a long-time shareholder in Riversdale, has a director on the board who has backed Rio Tinto's offer. So Tata Steel is clearly not hostile to the bid.
Tata Steel Managing Director Hemant Nerurkar has said the company is mainly interested in securing coal supplies from Riversdale.
"I don't think this cash increase would entice Tata Steel to sell their stake. It's not about value. They are more interested in not losing their coal supplies from Mozambique, because it's crucial for Corus," said Ravindra Deshpande, metals analyst at Mumbai's Elara Capital.
The wild card is Brazil's CSN, which recently raised its stake to just below the 20 percent threshold for making a full takeover offer, and has not publicly revealed its intention for the stake or possible talks with Rio Tinto.
It would make sense for the steelmakers to back Rio Tinto as it has deeper pockets and more technological skills than Riversdale to develop the Mozambique mines and infrastructure, the two miners and analysts have said.
If Rio's bid is not successful, Riversdale's shareholders are likely to face a big equity fund raiser by Riversdale to help finance the development of its coking coal projects.
"They can take A$16.50 now or work with us over the next few years in getting the projects up. But to do that is going to require dilution and a lot of debt, and at this point in time Riversdale has no debt. We're debt averse. We don't like being run by bankers," Mallyon said.
CULTURALLY SIMILAR
He said the company would need to raise around A$3 billion just to fund the first stage of its massive Zambeze project, which he said could come from U.S. bond investors as well as existing and new investors, like China's third-largest steel maker, Wuhan Iron and Steel .
Wuhan had an agreement to take a stake in the Zambeze project but that was put on hold when Rio Tinto swooped in.
Mallyon said Riversdale would be disappointed if Rio Tinto walked away, because culturally the company is similar to Riversdale and has the skills Riversdale's projects need.
"I'd hate to see them go," he said.
Mallyon said he had not spoken to CSN about its intentions, but given Riversdale's shares had risen sharply since CSN bought into the company in November 2009, he said the Brazilian company should be a willing seller at A$16.50 a share.
"At some point logic prevails... The fact that Rio does bring to the table not just money but some expertise to progress these projects a little bit faster than Riversdale, I think that's important if you're a steelmaker, because it's a pretty bleak landscape out there if you're sourcing coking coal," he said. (Additional reporting by Prashant Mehra in MUMBAI; Editing by Dhara Ranasinghe and Muralikumar Anantharaman)