* Yellow Pages business declining in Internet era

* AT&T will keep 47 pct stake in Yellow Pages unit

By Sinead Carew

April 9 (Reuters) - AT&T Inc said on Monday that it would sell a 53 percent stake in its declining Yellow Pages business to private equity firm Cerberus Capital Management LP [CBS.UL} in a deal worth $950 million including debt, allowing AT&T to focus on its core telephone business.

Once a cash cow for telephone companies, directories have become much less relevant in recent years as consumers turn to the Internet to find telephone numbers for businesses.

AT&T Chief Executive Randall Stephenson had said in January that he would consider selling the dwindling business, which generated about $3.3 billion in revenue last year.

Under the terms of the deal, AT&T will receive $750 million in cash, subject to adjustment, and Cerberus will take on $200 million in debt. AT&T will keep a 47 percent stake in the business, YP Holdings LLC.

AT&T, the second-biggest U.S. mobile service provider, said it expects the deal to have a minimal effect on 2012 earnings and does not expect a material gain or loss.

Pacific Crest analyst Steve Clement said it made sense for AT&T to sell more than half of the Yellow Pages business because that way AT&T will not have to include the dwindling revenue and earnings in its financial statements for its operating business. "It won't be a drag to the revenue and operating earnings any more," he said.

AT&T shares were down 1.1 percent at $30.60 on Monday morning on the New York Stock Exchange.

AT&T was constructed from the remnants of the old Bell Telephone system that had a near-monopoly in the United States until its government-mandated breakup in to separate companies in the 1980s.

As consumers have been disconnecting home phones in favor of cell phones and Internet service in recent years, AT&T now looks to cell phones, home broadband and television for growth.

While archrival Verizon Communications Inc spun off its directory business in 2006, AT&T held on to its Yellow Pages unit in the hope it could generate revenue growth, especially through its online service, yp.com.

The idea was that the directory unit's local sales force would give AT&T an advantage as advertising dollars moved from the phone book to the Internet. Things did not work out that way.

AT&T's revenue from its directory business fell 16 percent in 2011 when it posted a loss of $2.27 billion, including a $2.9 billion impairment charge. This compared with a profit of $855 million the year before.

"There may be some regrets there," said Bia/Kelsey analyst Charles Laughlin, referring to AT&T's decision to hang on to Yellow Pages. "It doesn't look like a good decision in hindsight."

Another analyst, Jennifer Fritzsche of Wells Fargo, said in a research note that the valuation was "sensible" at 2.1 times her 2012 estimate for earnings before interest, tax, depreciation and amortization, "given that the directory business is declining fairly quickly."

The transaction involves about 8,400 employees in the print and online business. After the deal, AT&T said its telephone directory business will honor existing union contracts.

The deal includes yp.com and about 1,200 print Yellow Pages titles that are delivered to about 150 million homes and businesses in 22 states and the online business. It also includes the businesses' local ad network, which includes more than 300 mobile and online publisher websites and the YPmobile app, which allows users to search local businesses from their mobile devices.

• A Permanent Economic Emergency