STOCKHOLM (Reuters) - Northvolt has held talks with a big industrial company on selling the business that makes electric battery packs for heavy industry, as a lack of funds forces it to try to divest one of its few profitable operations by the year-end, an internal memo shows.

The rush to sell is the Swedish company's latest effort to strengthen its finances and shrink the business to focus on battery cell production, rather than being an all-in-one-shop for making and recycling electric vehicle (EV) batteries.

Last month, Europe's biggest hope for an EV battery champion filed for U.S. Chapter 11 protection after talks to raise additional cash from stakeholders failed. 

It needs up to $1.2 billion in external long-term funding.

In its Chapter 11 filing on Nov. 21, Northvolt said it would try to sell Northvolt Systems Industrial, which makes batteries for industrial applications and sits within the unit called Northvolt Systems. 

Northvolt Systems' main operations are in Poland, including the factory Northvolt Dwa.

The value of the business is not known, but Northvolt's outgoing CEO said last month it is one of its few businesses to make a profit.

The batteries are used in drill rigs and in construction to power machinery such as forklifts. Swedish mining equipment maker Epiroc and Finnish engineering group Konecranes are customers.

The company has had promising discussions with a "large industrial company," which it did not name, for about two months around a potential sale, an internal announcement to staff on Nov. 22, reviewed by Reuters, said.

The memo's contents have not previously been reported.

While talks were preliminary, the memo said it would seek to seal a deal in the coming weeks.

If it does not find a buyer, it will have to close the business because Northvolt cannot afford to operate it beyond this year, it said.

Asked about the year-end deadline, a spokesperson from Northvolt Poland said: "We're optimistic towards reaching a positive outcome, and that's what we are focused on right now."

In the Nov. 21 Chapter 11 filing, Northvolt also disclosed plans to wind down its energy storage business that is also part of the Northvolt Systems unit.

The business makes products for storing excess power for later use.

REVERSAL

The decisions for the two businesses were taken independently of the Chapter 11 process, the company said in the memo.

Provided the sales go ahead, Northvolt's business would be largely reduced to its battery factory in Skelleftea in northern Sweden and its R&D facility in Vasteraas, close to Stockholm.

They would mark a reversal of a previous plan outlined on Sept. 9 when Northvolt said it would look for strategic partners for the energy storage business.

The spokesperson said on Tuesday it had been unable to find investors.

Closing the energy storage business will result in about 130 redundancies in Poland, the company told Reuters. 

Northvolt's plans for two battery factories in Germany and Canada are likely to be delayed, the company has said in recent weeks.

CUSTOMERS WATCHING

Epiroc said it would evaluate the situation in great detail if the industrial battery business was sold to a third party.

"We would want to ensure (...) that the batteries would continue to have the same top quality that we have so far experienced, and also that timely delivery of the batteries would be safeguarded," Epiroc said.

It declined to comment on whether it was in talks to buy the business. Konecranes said that it had not discussed buying it. 

While exiting the battery storage sector would reduce costs, Northvolt would lose out on a potentially lucrative market, battery analysts said.

Struggling with slower than expected demand for electric vehicles, some battery makers have focused on this market, tapping growing demand from governments and companies wanting to use storage to protect against high energy prices, Andy Palmer, founder of consultancy Palmer Automotive said.

"Northvolt undoubtedly stretched itself too wide, but might rue the day it exits from this (...) market," Palmer said.