Race for Charter heats up with rival approach

LONDON Tue Aug 23, 2011 1:24pm EDT

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LONDON (Reuters) - Toolmaker Charter International CHTR.L is in talks with an unnamed bidder, putting more pressure on spurned suitor Melrose NYN.L to come back with a higher offer or walk away.

Charter confirmed an earlier Daily Telegraph report on Tuesday that talks had taken place with a rival bidder, but not that it was the company named by the Telegraph, the world's largest welding firm, Ohio-based Lincoln Electric (LECO.O).

A source familiar with the situation told Reuters the mysterious rival suitor was not Lincoln, which bid $565 million for Charter in 2000 but later withdrew.

"Lincoln is not in talks with Charter," the source said.

The Telegraph said talks had taken place over a 1.5 billion pound ($2.5 billion) proposal involving Lincoln, potentially trumping a lower offer from manufacturing buyout firm Melrose.

"The company confirms that it is in discussion with a potential offerer other than Melrose regarding a possible offer for the company," Charter said.

A sector analyst said that under UK takeover rules Charter was only obliged to comment on the accurate part of a press report. As Charter confirmed it received an approach but didn't refer to Lincoln as the bidder, it could indicate that Lincoln is not involved in the bidding, the analyst said.

"We do not think it is appropriate to comment on ongoing market activity, rumors, or speculation regarding proposed acquisitions or mergers which may affect the arc welding industry, competitors or customers," Lincoln said.

The analyst said there was speculation private-equity house TPG TPG.UL could be part of the bidding process.

Other possible suitors include U.S.-based Illinois Tool Works (ITW.N), Switzerland's Sulzer AG (SUN.S) and Sweden's Alfa Laval (ALFA.ST).

The Telegraph cited City sources as saying Charter received an 870 pence per share indicative offer last week, after a price range of up to 900 pence was discussed.

Melrose, which has had two approaches rejected by Charter, is prepared to offer 840 pence per share.

Melrose faces a September 6 deadline from Britain's Takeover Panel to make a formal bid. If the company misses the deadline, it would be prevented from bidding for Charter for the next six months.

SHAREHOLDERS PREFER MELROSE PAPER

Two top shareholders, however, said they would prefer an 840 pence per share offer including Melrose's shares to an 870 pence per share full cash bid from another player.

One of them said the rationale of the deal was to get Melrose's skillful management on board to turn around the firm.

"The long-term value (of Charter) exceeds 850, 860 and even 870 pence. There is very little upside of cashing in 870 pence immediately. It makes much more sense to take Melrose's paper and wait for getting a better value in about five years," the top 10 shareholder said.

Panmure Gordon analyst Oliver Wynne-James said Melrose, which buys and fixes ailing manufacturing companies before selling them on, could struggle to raise its bid again.

"Shareholders in Melrose may have some misgivings about backing a bid at a higher level," he said. "At 9 pounds, it is beginning to get a little uncomfortable relative to the number of shares it would have to issue."

Shares in Charter closed up 20.1 percent at 747 pence, still well below the 840 pence Melrose is prepared to pay. Melrose was up 2.9 percent at 293 pence.

Charter has so far refused to open its books to Melrose, which has said it would not be appropriate to proceed with an offer without undertaking due diligence unless a rival bid emerges.

Melrose has said any offer it makes would be a mix of cash and stock. But the company's shares have fallen steeply in the recent market sell-off, meaning that Melrose would have to issue 300 million shares just to finance 70 percent of the deal. The company has 390 million shares outstanding.

"From my perspective, given what's happened in markets, I wouldn't want to see that (840 pence bid) increased," a leading Melrose shareholder said. "We've seen some very large share price falls, and Melrose itself has suffered, so I don't see any need for them to be aggressive upping their bid level."

The Telegraph cited speculation the approach came from a party linked to Lincoln. The report said Lincoln's advisor, Bank of America Merrill Lynch (BAC.N), has held informal talks with Charter's advisor Goldman Sachs (GS.N) in recent days.

In July, Reuters reported Charter was likely to be targeted by U.S. rivals attracted by the prospect of its welding tools business ESAB, the world's second-largest.

($1 = 0.607 British Pounds)

(Additional reporting by Stephen Mangan, Adveith Nair and Chris Vellacott; Editing by Erica Billingham and Will Waterman)

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