* Charter's welding unit prime attraction in any deal
* Bidding for Charter could rise to $2.6 bln - analysts
* Shareholder: Board trying to flush out white knights including Lincoln
* ITW more likely suitor than Lincoln Electric
LONDON/BANGALORE, July 7 Charter International , a UK-based industrial tools maker which last week rejected a $2 billion approach, is likely to be targeted by U.S. rivals attracted by the prospect of its welding tools business, the world's second-largest.
Charter last month issued a profit warning -- sending its shares down 28 percent -- lost its CEO, and turned down what it said was an opportunistic 780 pence per share approach from buyout firm Melrose that valued the company at just over $2 billion. The stock price has powered back up to 834 pence, not far from a 3-year high, and suggesting investors eye a higher bid.
"Charter's welding business is a leader in territories and end-industries outside North America and China, and we would expect trade buyers to trump Melrose's first bid level," said Panmure Gordon analyst Oliver Wynne-James.
Analysts reckon Melrose's interest could stir higher offers from Charter's rivals who would covet the company's core welding tools unit, ESAB. Bidding could reach 1.6 billion pounds, or $2.6 billion, they said.
"I haven't really put my finger on a particular price, but I'm very much mindful this has a bit further to run, so I'm very much in a 'let's sit back and watch this' phase," said one of Charter's top-10 shareholders, who asked not to be named given the sensitivity of the issue.
ESAB, the world's No.2 welding company, brings in about two-thirds of Charter's revenue, but it has struggled to keep up with competition as input costs rise. U.S.-based rivals Lincoln Electric and Illinois Tool Works , the world's No.1 and No.3 welding companies, could be drawn into the fray.
"I understand the board istrying to flush out white knights that could be potentially interested in taking over, including Lincoln," the Charter shareholder said. Jo Reedman, an industry analyst at Singer Capital Markets, also said Lincoln and ITW would have to consider possibly bidding, following the Melrose approach.
"If somebody else is looking to buy the second-largest company, somebody who'd be looking to invest, grow and improve the business, that's probably not going to be a good outcome (for Lincoln/ITW)," said Reedman. WELDING TOGETHER
ESAB would fit well with both Lincoln and ITW, but any deal would likely need either to sell off businesses in order to win regulatory clearance. ITW, which has almost doubled its sales in the past decade to about $16 billion, looks better placed in such a scenario. It has long used deals as part of its strategy, and in May set a target to add up to $1 billion in revenue this year through acquisitions.
"So far, they've done about $500 million," noted one analyst, who declined to be identified.
Buying ESAB would also help ITW offset some of its dependence on North America, and a deal would require fewer sell-offs as it would be expanding in a relatively new market. "Most of ITW's operations are in North America, while a dominant part of ESAB operations are in Europe," said Singer's Reedman. "I'd still expect divestitures, but I'd expect there to be less than for Lincoln." ITW, which reported $1.1 billion in cash and equivalents at end-March, attempted a similar sized deal in 2008, but failed to win Enodis, a British company that was later bought by Manitowoc Co Inc .
"Generally, ITW has paid a maximum of 1 times sales for acquisitions, which could suggest an upper limit of 950 pence for Charter," Reedman said. A deal at that price would imply a valuation of about $2.6 billion for Charter, excluding debt. Lincoln Electric, which bid $565 million for Charter in 2000, but later withdrew, would probably have to sell off more businesses to win Charter this time around.
Lincoln and ESAB hold equal market leading positions in South America and could be required to divest some businesses there.
Apart from that hurdle, uncertainty over the possibility of Charter splitting itself up could also deter Lincoln, which is more likely to make smaller add-on acquisitions in welding. "It doesn't seem like Charter is interested in breaking up the company ... and Lincoln certainly wouldn't absorb the Howden business," said Longbow Research analyst Mark Douglass, referring to Charter's air and gas handling business.
Private equity, or Melrose, could look to be a part of a deal by snapping up Howden, which has little synergy with ESAB, analysts said. (Reporting by Adveith Nair in LONDON and Bijoy Koyitty in BANGALORE; additional reporting by Sinead Cruise in LONDON; Editing by Ian Geoghegan)