LONDON (Reuters) - VT Group has set its sights on an offer of 800 pence a share from suitor Babcock International but analysts believe the group's improved offer, which is worth up to 715 pence, could be sufficient to tempt VT shareholders into push for talks.
"Shareholders will take around 800 pence a share before they tell VT to talk," a source familiar with VT's thinking told Reuters Thursday.
Babcock Thursday increased its proposed offer to buy the defense and public services firm to as much as 1.29 billion pounds ($2 billion) with a proposal to pay 0.701 new Babcock shares plus an unspecified sum of cash.
Shares in VT Group were up 4.2 percent at 647.5 pence by 5:47 a.m. ET, having earlier hit a new 20-month high of 665 pence and extended their gains so far this week to 30 percent.
Shares in Babcock were 2.7 percent down at 551 pence.
VT said in a statement in response that the latest cash and shares proposal, worth between 680 and 715 pence a share, was only a "small improvement" on the 633.9 pence previously offered and "continued to significantly undervalue VT and its prospects."
The new offer values VT at between 1.22 billion and 1.29 billion pounds ($1.9 billion to $2 billion) and represents an increase of between 7.3 and 12.8 percent.
Analysts and a major VT shareholder have said an offer of around 700 pence should get the two sides to the negotiating table given it would represent a fairly healthy takeover premium of around 40 percent.
However, Canaccord Adams analyst Michael Donnelly said that the prospects of "a raised offer of much beyond 700p to be very unlikely."
A source close to Babcock told Reuters that the defense services firm's new offer was conditional on Babcock being able to look at VT's books.
"Babcock wants to see how VT accounts for its long-term contracts, how it is structured and to see if its synergy estimates are fair or conservative," the source said.
Babcock's chief executive Peter Rogers believes combining the two firms could save more than 27 million pounds a year, but analysts believe that could be bettered given a combined cost base of nearly 3 billion pounds and likely growth synergies.
"Within this range we estimate that the company would need to increase the synergies required to around 35-45 million pounds to support a higher bid, something which we believe is possible if Babcock management are allowed access to VT's books," said Citigroup analyst Hugo Mills.
Reuters had reported earlier this week that Babcock was ready to raise its offer in return for access to VT's books and that a top shareholder in both companies believed Babcock would need to raise its offer to around 700 pence to force talks.
Babcock's latest offer is between 34 percent and 41 percent higher than Friday's closing share price of 508 pence -- a premium that analysts have said would be in line with other deals.
VT, which pulled out of naval shipbuilding a year ago following a merger of that business with BAe Systems, says that the proposed tie-up does not make strategic sense given that it has been trying to reduce its exposure to the defense industry.
"The transaction would put further strain on Babcock's already leveraged balance sheet, which also remains exposed to pension liabilities of over 2 billion pounds," it added.
Editing by Greg Mahlich