(Recasts, changes dateline, adds Spotless response, background)...

(Recasts, changes dateline, adds Spotless response, background)

SYDNEY, March 21 (Reuters) - Australia's Downer EDI Ltd (DOW) on Tuesday offered to buy cleaner-caterer Spotless Group Holdings Ltd (SPO) for A$1.27 billion ($982 million), almost a third below the price it was listed at after a private equity turnaround three years ago.

Downer offered A$1.15 for each share of Spotless it does not already own, a premium to its last trade of A$0.78. However, the offer is nearly a third below Spotless's A$1.60 issue price when private equity firm Pacific Equity Partners (PEP) listed it in 2014.

The buyout would give engineering contractor Downer another income stream after its main mining-related business was hit by falling commodity prices. In February, it posted a rise in half-year profit and upped its earnings guidance after a diversification strategy paid off. nL4N1FM4QD

"The acquisition of Spotless is a significant investment in Downer's strategy to expand its capabilities and strengthen its position as a leading provider of services to customers in Australia and New Zealand," Downer Chief Executive Grant Fenn said in a statement.

Spotless said in a statement that it would evaluate Downer's offer and shareholders should take no action until it made a recommendation. It added that the offer was "highly conditional" including a minimum shareholder acceptance of 90 percent.

In February, Spotless said first-half net profit fell by a third after it took a restructure and impairment charge, which it said reflected a weak performance in the business, construction and resources sectors.

Spotless has meanwhile been served with a class-action lawsuit on behalf of shareholders in relation to changes in its earnings guidance since listing.

PEP listed Spotless less than two years after taking it off the market, with promises to boost its earnings by stripping costs and selling underperforming divisions.

Downer, which acquired a 19.9 percent stake in its target late on Monday, said it would fund the deal mostly through the sale of A$1 billion worth of new shares to its existing shareholders.

Shares in Downer and Spotless were in a trading halt in Tuesday.

($1 = 1.2938 Australian dollars)