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UPDATE 2-Ashland looks to sell water treatment unit after hedge fund push

* Jana Partners says move "encouraging"; seeks more

* 3rd-quarter income from continuing operations falls 27 pct to $117 mln

* Total revenue falls 4 pct to $2.1 bln

* Shares rise 3 pct

By Sayantani Ghosh and Kanika Sikka

July 25 (Reuters) - Valvoline motor oil maker Ashland Inc said it was considering selling its water technologies unit, but activist investor Jana Partners said the company needs to do more to boost value for shareholders.

Ashland's water treatment business, the third largest among the company's four units, supplies chemicals to industries including pulp, paper and mining, and accounted for about a fifth of Ashland's total revenue in 2012. The business also makes products such as biocides, coagulants and wood adhesives.

Ashland shares rose as much as 3 percent in morning trade.

"We continue to see significant unrealized value within Ashland's portfolio of businesses, and we are encouraged that the company is starting on the path to unlock this value," a Jana Partners spokesman told Reuters.

Jana Partners picked up a 7.4 percent stake in Ashland in April and said the company's stock was "undervalued."

"The presence of Jana Partners as a major shareholder has increased the pressure on management to accelerate the process of trying to divest non-core units," SunTrust Robinson Humphrey analyst James Sheehan said.

Ashland and other large U.S. chemical companies, including DuPont and Dow Chemical Co, are looking to sell their non-core, cyclical assets and focus on businesses that generate higher margins even during downturns.

Ashland in April raised its quarterly dividend by more than 50 percent to 34 cents - the highest it has paid - and also unveiled a $600 million stock repurchase plan, in response to Jana Partner's stake.

The company had expanded the water technologies business with its $2.6 billion acquisition of Hercules Inc in 2008, saying the deal would reduce earnings volatility, improve profitability and generate stronger cash flow. ()

Revenue from the business fell 9 percent last year.

"Management has been trying to improve profitability in the Water Technologies business for several years, without much success until very recently," Sheehan said.

Sales at the unit increased 2 percent in the third quarter, as strong sales to Ashland's pulp and paper customers were offset by weak demand at its industrial water business, which includes utility water and municipal wastewater treatment.

The company has also initiated the sale of its rubber business, and said this was part of its continuing plan to shave off non-core assets.

The rubber business, which primarily serves the North American replacement tire market, accounts for about a fifth of the performance material unit's revenue.

"The tire elastomers business has low margins and is very volatile, and does not fit with the company's high-margin specialty chemicals focus," Sheehan said.

DuPont said on Tuesday that it was planning to exit its once-lucrative paint pigments business to focus on a thriving agricultural unit, while Dow Chemical on Thursday identified three commodity-based businesses it wants to divest.

RESULTS AND OUTLOOK

Total revenue fell 4 percent to $2.1 billion, weighed down by a sharp decline in guar sales. Ashland produces Galactasol guar gum polymers, a substitute for India's guar beans, a key ingredient used in hydraulic fracturing, or fracking.

Revenue at Ashland's performance materials unit slipped slightly, mainly due to steep declines in the price of butadiene, a key raw material for elastomers or rubber.

Third-quarter income from continuing operations fell 27 percent to $117 million. The company's adjusted profit of $1.82 per share, which excludes inventory write-down charges and other items, came in below analysts' estimate of $1.84, according to Thomson Reuters I/B/E/S.

Ashland has been facing some shipment problems in the fourth quarter and July sales had come in below what it had expected, the company said on a conference call with analysts.

Ashland shares, which rose to $88.99 in morning trading on the New York Stock Exchange, have risen more than 7 percent since the beginning of the year to Wednesday close.