* 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 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)