UPDATE 3-Charter gets improved $2.2 bln bid from Melrose
* Gets 840 pence cash and stock approach from Melrose
* Says considering increased offer
* Melrose says shares to make up majority of any bid
* Charter shares up 1.7 percent, Melrose up 0.5 percent (Adds analyst comment, background, updates shares)
By Adveith Nair
LONDON, July 14 (Reuters) - Charter International said it was considering an improved offer from industrial investor Melrose that valued the British industrial toolmaker at 1.4 billion pounds ($2.2 billion).
Charter said on Thursday the 840 pence per share cash and stock offer -- 8 percent higher than a preliminary offer from Melrose -- was conditional on financing and due diligence.
It had rejected a previous 780 pence per share proposal.
A top 10 shareholder told Reuters that Charter was trying to "flush out white knights", including U.S.-based rival Lincoln Electric .
Rivals could target Charter to gain control of its welding tools business ESAB, the second-largest in the world but which has struggled to keep up with competition as costs rise.
Analysts said Lincoln Electric and Illinois Tool Works , the world's No.1 and No.3 welding companies, could both be drawn into the fray and Charter could be sold for as much as 900 pence per share.
Charter shares were up 1.7 percent at 830.5 pence at 1230 GMT, while Melrose shares were up 0.5 percent at 363.7 pence.
Singer Capital Markets analyst Jo Reedman said Charter was "clearly less hostile to this revised approach" and appeared more likely to open its books to Melrose, adding the revised offer was not necessarily a knock-out bid.
"We would expect the management of both Lincoln Electric and ITW's welding businesses to be concerned about the prospect of ESAB being acquired by Melrose, with its track record of investing in and turning round poorly performing businesses," Reedman said.
CASH AND STOCK BID
Melrose, which looks to buy underperforming industrial businesses and sell them after restructuring, said the majority of the revised offer would be satisfied by the issue of new Melrose shares.
"Melrose would include a 'mix and match' election within its proposed offer structure, allowing Charter shareholders to elect for more cash or more equity consideration, depending on their and other shareholders' elections," it said.
A cash and stock bid would give Charter shareholders a chance to gain from any increases in the value of Melrose shares, which are up 16 percent this year.
Before offer talks were made public, Charter shares fell 27 percent in two months as it battled management issues amid falling sales at its core unit. ($1 = 0.624 pound) (Reporting by Rhys Jones and Adveith Nair; Editing by Elaine Hardcastle and Dan Lalor)
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