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* VT rejects improved Babcock bid of 680 to 715 p per share
* Babcock bid of 800p/share could force talks - VT source
* Analysts, shareholders believe 750p offer could be enough
* Shares and cash offer is an increase of 7.3 to 12.8 pct
* Babcock says any deal must be an agreed one with VT
(Adds VT shareholder and Babcock response, closing prices)
By Rhys Jones and Paul Hoskins
LONDON, Feb 18 (Reuters) - VT Group VTG.L snubbed suitor Babcock International (BAB.L) for the second time in a week on Thursday, setting its sights on a 800 pence a share offer valuing the defence support firm at 1.44 billion pounds ($2.25 billion).
Shareholders and analysts said a 750 pence a share approach would probably be enough to at least get the two companies talking and rejected VT's argument that the proposed tie-up would not make strategic sense.
"There's certainly a consensus that says Babcock can go up to 750 pence without diluting their own earnings so that would seem to be the absolute bottom of an acceptable price," said Angela Lascelles, joint managing director at OLIM Ltd, citing broker figures. OLIM holds 1.49 percent of VT shares.
Babcock on Thursday increased its proposed bid to as much as 715 pence per VT share, paying with 0.701 new Babcock shares plus cash in an offer valuing VT at up to 1.29 billion pounds.
VT responded by saying Babcock continued to significantly undervalue its business.
"Shareholders will take around 800 pence a share before they tell VT to talk," a source familiar with VT's thinking told Reuters.
Shares in VT Group, once a naval shipbuilder but now a support services company which provides flight training for Britain's Royal Air Force and supplies cranes and bulldozers to the army's Royal Engineers, closed up 6.2 percent at 660 pence, having earlier hit a new 20-month high of 665 pence. Shares in Babcock ended 2.3 percent down at 553 pence.
"Babcock have thrown two punches but I don't think the second has been a knockout," said Panmure analyst Mike Allen who raised his price target on VT stock to 775 pence from 630 pence.
"Babcock clearly need to see VT's books but 700 pence doesn't look to have been enough so perhaps 750 pence could be a starting point."
Babcock, which services the Royal Navy's submarines and is part of the consortium due to deliver Britain's next generation of aircraft carriers, said any bid depended on it securing the backing of VT's board and getting access to VT's books.
"The making of any offer by Babcock remains subject to ... Babcock being granted access to conduct satisfactory due diligence (and) the unanimous and unqualified recommendation by the Board of VT," Babcock said.
A company spokesman earlier denied a report by Bloomberg that Babcock was ready to go hostile.
Analysts also said Babcock will wish to avoid going hostile because of the need to access VT's books before committing on price. It will want to assess the value of longterm defence contracts, which can be difficult to gauge from a distance.
"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," a source close to Babcock told Reuters.
Reuters had reported on Wednesday that Babcock was ready to improve its offer but that it would be conditional on seeing VT's accounts. [ID:nLDE61G15X] [ID:nLDE61F1J2]
VT said 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.
"Seven hundred pence hasn't been enough to get VT's board interested so somewhere between 700 and 800 pence might well be enough," said KBC Peel Hunt analyst Andrew Nussey.
At 715 pence, the upper end of Babcock's latest offer is about 40 percent above last Friday's closing share price, which analysts consider to be a fairly healthy takeover premium.
Babcock's chief executive Peter Rogers says 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 (offer) 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," said Citigroup analyst Hugo Mills.
VT, which sold out of its naval shipbuilding business in October, selling it to BAE Systems (BAES.L), says that the proposed tie-up does not make strategic sense given it has been trying to reduce its exposure to the defence industry.
Babcock, however, said there was "significant commercial logic" to a deal while VT shareholder Lascelles also said she could see the sense in it.
"The idea of having a specialist ... company focusing on outsourcing for the MoD (Ministry of Defence) in a time of decreasing capital expenditure -- that makes sense," Lascelles told Reuters.
"I'm sorry that VT won't be in the driving seat, because I think Paul Lester's very good. But the market's dictating here." <For separate Factbox please double-click on [ID:nLDE61H1ZZ] > ($1=.6400 pounds) (Additional reporting by Quentin Webb and Paul Sandle; Editing by Greg Mahlich)