UPDATE 5-Destination Maternity keen to buy UK's Mothercare
* Destination Maternity's two bid proposals rejected
* 2nd proposal worth 266 mln stg would involve tax inversion
* Takeover Panel gives Destination until July 30 to make bid
* Shares in Mothercare up 10 pct
* Graphic on valuations: link.reuters.com/nuv32w (Adds Breakingviews link)
By James Davey and Francesco Canepa
LONDON, July 2 (Reuters) - U.S. baby product retailer Destination Maternity will continue its pursuit of Britain's Mothercare after revealing on Wednesday it had two bid proposals rejected.
Mothercare confirmed it had spurned an increased offer proposal from Destination Maternity of 300 pence a share that valued the UK firm at 266 million pounds ($453 million) - the latest example of a U.S. company seeking to buy a foreign firm in part to take advantage of lower corporate tax rates abroad.
That proposal on June 1 implied a premium of 29 percent to Mothercare's closing share price on Tuesday of 232.5 pence. Mothercare shares were up 10 percent at 255 pence by 1430 GMT.
Destination Maternity CEO Ed Krell said: "We are seeking to engage with the board of Mothercare on a constructive basis with the goal of completing a recommended transaction." He said there was a compelling rationale for a combination of the two firms.
Destination Maternity's 300 pence proposal comprised 230 pence in cash and shares valued at 70 pence in a new holding company that would be listed on the New York Stock Exchange or Nasdaq but incorporated in the UK, and which would also own the U.S. firm's existing business.
That structure would allow the U.S. firm to benefit from Britain's lower company tax rate compared with the United States. Britain's corporate tax rate has already attracted other U.S. predators for so-called "tax inversion" deals, including drug company Pfizer, which failed in an attempt to takeover rival AstraZeneca.
Mothercare said it rejected Destination Maternity's proposal on June 3, saying it "significantly undervalued Mothercare and its attractive prospects," and had "significant transaction execution risks," given the proposed transaction structure.
Under Britain's takeover rules Destination Maternity has been given until July 30 to announce a firm intention to make an offer for Mothercare, or walk away.
"While the offer price should be attractive to shareholders, an initial look at Destination does not suggest to us that it would be an easy deal for Destination to digest," Liberum analysts said. "This could draw out other potential bidders."
Nasdaq-listed Destination Maternity, which trades from over 1,900 retail locations, has a market value of $316 million. Its shares have fallen 23 percent so far this year and its net income almost halved in the three months to March 2014.
Mothercare, hit hard by cut-price competition from supermarket groups and online retailers in its main UK market, issued a profit warning in January and prior to Wednesday its shares were down 41 percent so far this year.
The company, which has more than 1,200 stores worldwide, has been trying to fight back by revamping UK stores, closing weaker ones and expanding online and abroad.
It had aimed to make a profit on its loss-making British operations by 2015, but said in January that 2016 to 2017 was now more realistic.
Cantor Fitzgerald analyst Mike Dennis noted that the economic value of Destination Maternity's bid proposal was 381 million pounds - 266 million pounds in equity, average net debt of 65 million pounds and a pension deficit of 49.7 million.
Interest in Mothercare from short sellers has been rising this year and is now at its highest in over 12 months, Markit data show, suggesting investors were not betting on a bid materialising. Short sellers borrow a stock and sell it, betting they will be able to buy it back at a lower price before returning it to the lender, pocketing the difference.
Around 27 percent of Mothercare's shares available to be borrowed are out on loan, compared to around 3 percent for the British stock market at large, the data showed.
($1 = 0.5877 British Pounds) (Reporting by James Davey and Francesco Canepa; Editing by Jane Merriman and Mark Potter)
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