PARIS (Reuters) - France's Bouygues is buying the engineering services business of Swiss utility Alpiq for 631 million pounds (850 million Swiss francs) to tap rising demand for energy services.

The deal, announced on Monday, is the latest in a sector where technology and construction firms are looking to cash in on growing interest for energy savings and smart grid technology.

The cash transaction will make the French conglomerate the fifth-largest player in energy services in Europe, with annual sales of about 3.9 billion euros ($4.8 billion).

Rivals include France's Engie, Vinci, Spie and Eiffage, as well as Germany's Bilfinger.

Bouygues Construction will pay 700 million francs and its Colas Rail unit will pay 150 million francs.

"Through the combination of our skills and the complementary nature of our businesses, this acquisition establishes Bouygues Construction as a benchmark player in energy and services in Europe," Philippe Bonnave, Chairman and Chief Executive of Bouygues Construction, said in a statement.

Alpiq, which has a market value of around 2 billion francs, said last year it was looking to find a buyer for the businesses as part of a drive to reverse losses from its dam operations.

At 0940 GMT, Bouygues shares were up 0.7 percent and Alpiq's up 5.75 percent.

"This acquisition will allow Bouygues to increase by 50 percent the size of its Energy and Services division, but also expand its foothold in Switzerland, Germany and Italy," said Gregoire Laverne, fund manager at Roche-Brune Asset Management.

Recent deals in the sector include Eiffage's purchase of a 51 percent stake in Dutch group Kropman in February, while Spie bought Germany SAG for 850 million euros in 2016.

Bouygues is paying 12 times average earnings before interest and tax (EBIT) over the last three years, in line with recent sector deals, a source close to Bouygues said.

Colas CEO Herve le Bouc said the deal would allow Colas Rail to develop in the Swiss and Italian markets and strengthen its presence in Central Europe and Britain.

The deal, expected to close in the second half of this year, is subject to approval by European and Swiss competition authorities.

Alpiq Engineering Services employs around 7,650 people and had 2017 sales of almost 1.7 billion francs, mostly in Germany, Switzerland and Italy.

Alpiq reported on Monday its fifth loss in seven years, hit by low European power prices.

Family controlled Bouygues had 2017 sales of 33 billion euros, with the bulk coming from construction. It also builds roads, owns France's biggest private TV company, TF1, and France's third-largest mobile operator Bouygues Telecom.

(Reporting by Dominique Vidalon and Gilles Guillaume, Arno Schutze, Blandine Henault; Editing by Louise Heavens and Mark Potter)

By Dominique Vidalon and Gilles Guillaume

Stocks treated in this article : Bouygues, Eiffage, TF1, Vinci, ENGIE, Alpiq Holding AG, Bilfinger SE, SPIE