Dealtalk: Market volatility could lower Charter bid price

LONDON Mon Aug 8, 2011 7:25am EDT

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LONDON (Reuters) - A sharp drop in Charter International's CHTR.L share price over the past week is adding to pressure for it to accept a bid from Melrose MYN.L at a price close to or even below the manufacturing buyout firm's sweetened offer.

Shares in the British industrial toolmaker fell nearly 15 percent last week, touching a low of 616.5 pence on Friday -- a level the company traded at before the Melrose offer was made public in June -- and far below the latest bid of 840 pence.

"I think obviously the share price is telling you something. It is saying that 840, given current market conditions, is no longer the right price," said a top-25 shareholder in Melrose.

Top Charter shareholders including Aviva and Schroders, who together own 14 percent of the company, have gone public asking management to open its books to the Melrose bid. Bankers say hedge funds controlling up to 20 percent of the company also favor a deal with Melrose.

Those calls will likely get stronger now as the company's stock has reversed most gains made since the Melrose approach was made public.

"A lot of the risk arbitrage guys who would have got involved have got badly burned and would have sold out, having piled in a lot higher up and will have had to exit," the Melrose shareholder said.

"It is certainly coming back in favor of the Melrose management."

Shares in Charter were down 2.3 percent at 674 pence on Monday and are 18 percent off the high of over 830 pence touched when Melrose sweetened its initial approach.

"The logic for a deal hasn't changed in the last three days," said a special situations analyst, referring to the drop in the value of Charter stock. "I think Melrose shareholders could still be persuaded to back a deal at 840 pence. Anything over 840 pence has gone away."

Last week, shareholders and analysts had said Melrose need only raise its takeover offer slightly to gain access to Charter's books.

However, analysts note Melrose might now choose to wait for markets to stabilize.

"I think Melrose's strategy now is to keep a low profile and see what happens in the market," said Panmure Gordon analyst Oliver Wynne-James. "They can't lower the valuation as Charter's board will say 'you're definitely not getting the books now.'"

"If there's some sort of recovery, Melrose could re-engage back at those 830-840 levels," the analyst added.

A Charter spokesperson, meanwhile, told Reuters the company's position that the Melrose proposal undervalues the company and its prospects was unchanged.

(Additional reporting by Sinead Cruise; Editing by David Cowell)

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