By Pav Jordan

TORONTO, Nov 20 (Reuters) - Cossette Inc, Canada's largest homegrown ad firm, urged shareholders late on Friday to accept an buyout offer from Mill Road Capital, saying a higher proposal from another firm did not yet constitute an official bid.

Cossette Inc, which has been in the middle of a takeover battle since July, said it was recommending shareholders vote in favor of a C$7.87/share bid on Nov. 10 from Mill Road, a U.S. based company.

Earlier in the day it revealed a confidential proposal from Canadian equity group Cosmos Capital, whose investors include two former founders of Cossette, to pay C$8.10/share for the company.

'For us it is not an official bid at this point,' Cossette spokeswoman Isabelle Perras told Reuters.

A takeover struggle has raged around Cossette since July, when Cosmos, whose investors include two founders of the ad agency, made a first bid at C$4.95 a share, which was rejected as too low.

Cossette is small by international standards -- ranked about 23rd globally -- but it is Canada's largest domestic shop, growing from small beginnings in the early 1970s to a transnational with Canadian clients like McDonald's, Bell Canada, General Motors and Coca-Cola.

Cossette's allure includes a strong presence in the French-speaking province of Quebec, a difficult market to crack for foreign companies. It also has assets or offices in the United Kingdom, where it set up in 2003, as well as in the United States and China.

Cossette said in the second of two statements filed on Friday it retained the right to consider a competing, unsolicited acquisition proposal, '...Which the Board believes, in the exercise of its fiduciary duties, represents, or could reasonably be expected to lead to, a superior proposal and to terminate the merger agreement in the event of such superior proposal.'

Perras said the Cosmos proposal was not yet an official bid that could yet be subjected to a board review.

SHOW US THE MONEY

Cossette also said it needed proof Cosmos could come up with the cash in its sweetened proposal.

'We have investors behind us who say we will go to C$8.10 a share,' Cosmos spokeswoman Sylvia Morin told Reuters.

'We couldn't have asked for a better outcome than for this to come to light,' she said, predicting Cossette shareholders would find it difficult to accept the Mill Road bid because it was lower.

The latest Cosmos offer, if made official, would raise the price tag on Quebec City-based Cossette for a fourth time since July and for the second time this week.

'Further information is required in order for the board to determine whether Cosmos' proposal at C$8.10 per share could reasonably lead to a superior proposal,' Cossette said.

The offer would value Cossette at C$135.3 million ($126.4 million). That would be slightly higher than a rival bid by U.S. private equity group Mill Road Capital at C$7.87 a share, or C$131 million, which Cosmos also matched earlier this week.

Cosmos, which is being advised by Genuity Capital Markets, controls 18.7 percent of Cossette. It also has lock-up agreements with Burgundy Asset Management, which holds 11.1 percent, and Beutel Goodman&Co, with 7.6 percent of the shares.

Cosmos said its offer earlier this week was fully financed, but it was conditional on due diligence and on receiving access to Cossette's virtual data room after it was barred from it in July, following its first hostile bid.

Cossette is being advised by BMO Capital Markets. Its shares were halted on Friday at C$8.01.

($1=$1.07 Canadian))

(Reporting by Pav Jordan; Additional reporting by Jonathan Stempel) Keywords: COSSETTE/COSMOS

(pav.jordan@thomsonreuters.com; +1 416 301 8153; Reuters Messaging: pawel.jordan.reuters.com@reuters.net)

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