BEIJING (Reuters) - Baidu Inc's <BIDU.O> planned sale of online video unit iQiyi to its own chief executive is priced too low and will damage its reputation, an investor in the Chinese internet company said.

In February, Baidu received an offer for its 80.5 percent stake in iQiyi from Robin Li and Yu Gong, the chief executives of Baidu and iQiyi, respectively. The offer valued the whole of iQiyi, China's second-biggest online video provider, at $2.8 billion on a cash- and debt-free basis.

"We worry that embracing what is an inherent conflict of interest will lead to damage to the reputations of both you and Baidu," U.S.-based investment firm Acacia Partners said in a July 18 letter to Li. The letter was distributed to media through public relations firm Finsbury, part of communications firm WPP.

Acacia, which according to the letter owns 2.6 million shares in Baidu - a stake worth nearly $430 million at current prices - said iQiyi's $2.8 billion price tag is "far too low".

The short-term improvement to Baidu's earnings produced by iQiyi's sale is trivial compared to the potential long-term value created for Baidu shareholders by owning iQiyi within Baidu, Acacia said.

"It is better for Baidu to be regarded as a key institution, not the extension of the pocketbook of one man," the letter said.

Baidu has formed a special committee comprising three independent directors to evaluate the offer. The committee has appointed JP Morgan Securities as financial adviser to help in the evaluation.

Baidu said in a statement it "upholds the highest standards of corporate governance". It said the "special committee continues to evaluate the proposed transaction and the company will provide an update on the progress when a conclusion has been reached".

The Chinese internet company bought the majority stake in the then loss-making iQiyi in 2012, a push into the highly competitive Chinese digital media market.

(Reporting by Paul Carsten and Yimou Lee; Editing by Edwina Gibbs and Muralikumar Anantharaman)