Charter says £1 billion Melrose approach opportunistic

LONDON Wed Jun 29, 2011 4:04pm BST

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LONDON (Reuters) - Embattled tool and equipment maker Charter International CHTR.L dismissed a $2 billion (1 billion pound) preliminary approach by manufacturing buyout firm Melrose' NYN.L, calling it "opportunistic."

Melrose, which looks to buy underperforming industrial businesses and sell them after restructuring, is looking at paying 780 pence per share -- a 30 percent premium over Charter's closing price Monday -- the day before it made the approach.

Based on Charter's 167 million outstanding shares, the deal could be worth a possible 1.3 billion pounds, or just over $2 billion.

Charter, whose stock has dropped 30 percent over the last two months amid problems at its core unit and the subsequent resignation of its Chief Executive, dismissed the offer as "highly preliminary, conditional and opportunistic."

It, however, added the board will meet to consider the unsolicited approach.

News of the approach sent shares in Charter up 28 percent to 784.17 pence -- levels they traded at in May -- just ahead of the bid level, indicating investors expect a higher offer.

Shares in Melrose were up 3.34 percent at 356.2 pence.

The news pushed shares in other British engineers higher, with industrial group Rotork (ROR.L) and engineering firm IMI (IMI.L) also rising more than 3 percent.

The Melrose approach comes two days after Charter announced the resignation of its Chief Executive, a week after it issued a profit warning on problems at its core welding unit, ESAB.

Analysts have said the company could be vulnerable to a buyout without a CEO amid a depressed rating.

Peel Hunt analyst Dominic Convey said more bids could emerge for Charter.

"It's possible that another bid might materialise," Convey said, pointing to Lincoln Electric (LECO.O), which made a failed attempt to buy Charter in 2000 and Weir (WEIR.L).

"One could imagine shareholders aspiring for a share price of 800 pence, or even 850," he said. "But given the challenges the ESAB business is facing right now, anything north of that would be quite difficult to achieve."

Meanwhile, Melrose said any offer it makes would be a mixture of cash and shares -- giving Charter shareholders a chance to gain from any upside in Melrose shares, which have so far risen 13 percent since the start of the year compared with a 27 percent fall in Charter stock.

A PIECEMEAL SALE?

Charter has two core units. It gets about a third of its revenue from Howden, which makes air and gas handling equipment, with the rest coming from the company's welding tools unit, ESAB.

Convey said the company might look to split the two units to unlock more value.

"There's no obvious synergy for having those two businesses under the same corporate umbrella," he said. "The prospect of splitting the two is possible and would unlock higher value."

The analyst said the ESAB and Howden mix is not necessarily attractive for possible bidders like Lincoln.

"Melrose might see that as part of their game plan as well," he added.

(Reporting by Adveith Nair; Editing by Rosalba O'Brien and Mike Nesbit)

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