LONDON France's Schneider Electric (SCHN.PA) has left the door ajar to rival bidders by offering shares as part of its 3.3 billion pound ($5 billion) takeover proposal for Invensys ISYS.L, as many of the UK engineer's investors would be prefer all cash.
While broadly satisfied with the level of Schneider's 505 pence a share proposal, some British fund managers who are only permitted to hold London-listed shares are worried about how much they might lose out by immediately having to sell the French stock they stand to inherit as part of the deal.
"If someone else came in, even at the same figure all-cash, that would be seen as more appealing," one of Invensys' 30 largest investors told Reuters.
Invensys has long been touted as a bid target in an industry dominated by larger rivals, particularly after the disposal of its rail unit last year, which enabled it to boost its finances and focus on its widely admired industrial automation business.
The British firm said on Friday Schneider - which has only confirmed it has made a proposal - was considering a bid of 319 pence in cash and 186 pence in stock for each Invensys share.
"They've done a huge mistake by offering shares, especially in a country like the UK where most shareholders can't hold foreign shares and at a time where uncertainty and volatility means everyone would want cash," said one sector banker, speaking on condition of anonymity.
Invensys shares touched a new 10-year high of 517.5 pence on Monday, signaling investors are optimistic of a higher bid.
Britain's Sunday Times newspaper said U.S. conglomerate General Electric (GE.N) was gearing up for 3.5 billion pound counterbid for Invensys.
Bankers have also suggested that U.S. group Emerson Electric (EMR.N), which was in talks to buy Invensys a year ago, might be interested, while Germany's Siemens (SIEGn.DE) and Switzerland's ABB ABBN.VX have also been touted as potential bidders.
A CLOSE CALL
However, a second banker who has worked closely with General Electric (GE) in the past, said he had been pitching this deal to it in vain for two years. GE declined to comment.
And a separate source familiar with the matter said Emerson, while having the firepower to table an all-cash bid, might be deterred by having to offer more than it bid last year.
"That can be a psychological hump to get over," he said.
Activist investor ValueAct Capital, which had built up an 8 percent-plus stake in Invensys over recent months, sold 4 million shares on Friday at 508.19 pence, trimming its holding to 7.52 percent, according to regulatory filings, and suggesting perhaps that it is cautious about the prospect of a bid battle.
"It looks like the deal is well-advanced," said a third sector banker. "I would not rule out a rival bid completely but a matching all cash bid could be a lot in terms of cash allocation for Emerson, GE and ABB."
Schneider has until August 8 to table a firm offer under UK takeover rules, and an extension to that deadline is possible.
"I would wait for Schneider to show their hand ... wait for them to shoot first," said the second sector banker. "They only have a proposal at the moment, not an offer, if you are a counter bidder, you want to see what's on the table."
A source familiar with Schneider said the French group was not currently considering a full cash bid and that it needed to keep some powder dry for Invensys' pension liabilities.
Schneider's board is also very keen to maintain a strong credit rating, a second source familiar with the firm said.
Schneider was not immediately available for comment. Its shares fell over 1 percent on Monday, extending Friday's losses.
Another source familiar with the matter played down the difficulty of selling Schneider's shares in the event its proposal succeeds, pointing out that the stock element of its proposal equates to less than 5 percent of the French group's market capitalisation and that its shares are very liquid.
($1 = 0.6615 British pounds)
(Additional reporting by Sinead Cruise and Steve Slater; Editing by Mark Potter)