Dealtalk: Charter deal seen closer as shareholders speak out

LONDON Tue Aug 2, 2011 2:15pm EDT

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LONDON (Reuters) - Manufacturing buyout firm Melrose MYN.L need only raise its takeover offer slightly to gain access to the books of reluctant target Charter International CHTR.L, bankers, shareholders and analysts said on Tuesday.

Some of Charter's shareholders -- such as Aviva Investors, the asset management arm of insurer Aviva (AV.L) -- have already spoken out publicly that the British engineer should allow Melrose to look at its books.

"My expectation would be that this deal will ultimately go through," a top 10 Charter investor told Reuters.

"They have managed to get a little more out of them (Melrose) and I think they will engage before long," he said of Charter, which is seeing shareholders this week.

Melrose buys, fixes and sells ailing manufacturing companies and first bid for Charter in late June, when a profit warning driven by the rising cost of raw materials at the company's ESAB welding division sent Charter's shares tumbling 24 percent.

Melrose shares have risen 14 percent year-to-date in contrast, an incentive for investors since any deal would be structured as a mixture of cash and stock.

Charter rejected a second Melrose offer in July of 840 pence a share or 1.4 billion pounds, equal to 0.74 times the company's estimated 2011 sales, according to Thomson Reuters Starmine data.

Bankers said that hedge funds controlling up to 20 per cent of Charter's stock were also supportive of Melrose, increasing the likelihood that the two sides would find common ground and engage in the next few weeks.

"Until the middle of last week, the (Charter) board weren't happy to open their books up until (a bid price per share of) about 10 pounds or more," said Panmure Gordon analyst Oliver Wynne-James.

"Following meetings (with shareholders) and some shareholder pressure, I think they will be looking at opening their books at anything above 840 pence per share," Wynne-James said, referring to Melrose's latest bid price.

Bankers familiar with the sector, but not advising on the deal, said that Melrose might be prepared to raise its offer to about 870 pence, or 0.76 times estimated 2011 sales, if it was promised due diligence.

Wynne-James said that Melrose "would probably let Charter go" if it had to pay more than 900 pence, or 0.79 times estimated sales for this year.

After rejecting the second offer, Charter's new Chief Executive Gareth Rhys Williams unveiled new growth targets and the company reported an increase in first half profits.

GAME OF CHICKEN

Shareholders said there was still some concern that Charter might resist a higher Melrose offer, which would likely lead to the industrial buyout specialist walking away.

Melrose has said it will not go hostile.

"Lots of people seem to be of a similar mindset to me. The situation we have seen with Laird - that is a company that is overplaying its hand and it has not exactly benefited the shareholders has it?" the top 10 Charter investor added.

Electrical products company Cooper Industries CBE.N withdrew its $875 million offer for British rival Laird (LRD.L) this week because the companies could not agree on price. Laird's shares fell 17 percent immediately after Cooper's announcement of its withdrawal.

Dublin-based Cooper raised its offer to 200 pence from 185 pence a share on July 27 and said that it might have further flexibility on price if the two parties entered talks.

Laird wrote to Cooper two days later insisting it would only enter talks at 220 pence a share, after which Cooper withdrew its bid.

"Laird and Cooper were playing chicken just like Charter and Melrose," said a banker that advises British companies.

"Still the crucial factor is that shareholders have publicly called for Charter to open its books. That is powerful and it did not happen with Laird," the banker said.

(Additional reporting by Sinead Cruise and Simon Meads. Editing by Jane Merriman)

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