(adds further detail, background)
By David French and Mirna Sleiman
DUBAI, April 10 (Reuters) - A joint bid by TPG Capital and Abraaj Group has emerged as the favourite to acquire a majority stake in Saudi fast-food chain Kudu after the selling shareholders entered exclusive talks with the pair, three sources aware of the matter said on Thursday.
The two have seemingly edged out fellow private equity house KKR & Co, which was also competing for the asset, sources told Reuters in November.
The move to hold negotiations with just one bidder doesn't guarantee that a deal will be agreed but signals that all three parties still involved will be increasingly confident something can be secured, two of the sources said.
"They're still working on it but the feeling seems to be that it's close to being done," said one, a Saudi-based source with knowledge of the transaction.
Should the private equity pair complete a deal, it will be TPG's first investment in the Middle East. Abraaj, the Middle East's largest private equity firm, previously bid on its own for the stake but later teamed up with TPG.
TPG, Abraaj and KKR all declined to comment, while Kudu could not be reached for comment.
Riyadh-based Kudu, which operates more than 200 restaurants in the kingdom, is owned by four individual shareholders, including chairman and chief executive Abdulmohsen Bin Abdulaziz Al Yahya, according to data from Zawya, a Thomson Reuters unit.
Kudu is worth around 2 billion riyals ($533.3 million) based on a valuation of around 20 times earnings, and was expected to have net income of around 100 million riyals in 2013, a source told Reuters in November.
Interest in the business has been high, given the kingdom's booming consumer sector - which is benefiting from an increasingly wealthy Saudi population, of which around 60 percent is under 30 years of age.
Other international firms have targeted Saudi-based firms in recent years.
Coca-Cola Co paid $980 million in December 2011 for a 50 percent stake in Aujan Industries, one of the largest beverage companies in the Middle East, while in the same year Carlyle bought a 42 percent stake in a Saudi-based food franchise operator that runs Domino's Pizza and Wendy's restaurants in the Middle East and North Africa.
Citigroup Inc's venture capital arm and Dubai-based Levant Capital bought a $100 million controlling stake in Saudi Arabian supermarket chain Al-Raya For Foodstuff Co last year.
HSBC Holdings is advising on the sale of Kudu shareholders. ($1 = 3.7502 Saudi Riyals) (Editing by Mark Heinrich)