* Freenet mandates Citi as adviser - sources
* Talks begin among company representatives - sources
* Could someone buy Freenet's stake in Sunrise?
By Arno Schuetze, Oliver Hirt and Douglas Busvine
FRANKFURT/ZURICH, June 3 (Reuters) - Germany's Freenet has hired Citi to explore possible options for improving terms of the deal for Sunrise Communications -- in which it is the largest shareholder -- to buy Liberty Global's Swiss UPC cable business, sources close to the matter told Reuters.
The German telecoms group made the move in a bid to secure better terms for the 6.3 billion Swiss franc ($6.32 billion) transaction, the sources added, with one describing the tone of the talks as "not driven by harmony".
Freenet's finance chief, Ingo Arnold, had told Reuters in April that it saw room to win better conditions. Freenet declined further comment.
Freenet, which owns 24.5% of Sunrise, blocked the Swiss company's plans to authorise fresh capital that could have helped finance the UPC acquisition.
The deal has not fallen through, however, and Freenet has said it would observe how UPC performs to see whether its valuation is justified in the run-up to a Sunrise shareholder meeting expected this year where a simple majority would be needed to agree a proposed capital hike.
TOO MUCH RISK?
Freenet has said the structure of the deal left existing Sunrise shareholders too exposed to risks. Chief Executive Christoph Vilanek has said that rather than an all-cash deal, he would prefer a merger in which Liberty Global bears some risks.
Sunrise wants to use a 4.1 billion Swiss franc rights issue to finance the deal, raising more than Sunrise is now worth on the stock exchange.
Freenet has said it will not participate in the rights issue but has not said whether it will oppose it.
Freenet's Sunrise stake gives it some leverage because not all shareholders attend general meetings. It was unclear whether Freenet's efforts to rally additional shareholders to its view will succeed.
But Sunrise is eager to have Freenet on board, said one person familiar with the situation. The talks were only at an initial stage. Another source said it was unclear whether Sunrise and Liberty wanted to make any concessions.
Sunrise and Liberty have repeatedly affirmed that the main points of the deal will not be changed. Break fees would fall due should one side try to change the terms unilaterally.
"We are of course interested in a constructive solution but there are no concrete discussions at the moment," a Sunrise spokeswoman said.
One way out of the situation could be for Freenet to sell its Sunrise stake to Liberty or third parties. Bankers say there is investor interest in buying at least part of the Freenet stake at current market prices of around 70 francs.
Freenet has said the shares are worth over 80 francs.
A source close to the deal pointed out that Liberty's intention with the Sunrise deal was to exit the Swiss market -- following similar deals in Austria and Germany. Liberty was not in direct discussions with Freenet, nor did it have any plans to buy Freenet's stake in Sunrise.
Swiss competition authorities have decided to "examine in detail" the takeover. Sunrise said it expected a decision by early October and anticipated completing the deal in the fourth quarter.
Liberty declined to comment. UPC Chief Executive Severina Pascu said her team was focused on strategy execution after a strong first quarter, and on preparing for the Sunrise deal. ($1 = 0.9968 Swiss francs) (Editing by Michael Shields)