September 27, 2011 10:00 pm

Melrose pulls out of Charter bid talks

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Melrose has pulled out of talks to acquire UK engineering company Charter International, clearing the way for a £1.5bn ($2.3bn) takeover by US-listed Colfax.

In a statement after the market closed on Tuesday, Melrose said that it had completed due diligence and agreed financing terms with its banks, but that in the “current climate” it was not in its shareholders’ best interests to proceed with an offer.

Melrose, an engineering turnround specialist, had begun talks with key Charter shareholders to draw up plans for an offer last week but with volatile markets, the gap between the value of the two offers was seen as too wide to bridge.

With Colfax stock trading at about $21, its cash and stock offer for Charter valued the FTSE 250 engineer’s shares at 895p each, a 3.1 per cent premium to Charter’s closing price on Tuesday.

Melrose shares closed up 6.19 per cent on Tuesday at 290p, which meant its own indicative cash and stock offer valued Charter at 834p a share.

Charter’s two biggest shareholders, Aviva and Schroders, have been supportive of a formal bid by Melrose, even though Charter’s board has recommended the Colfax offer.

Charter said that its board had “secured very good value for shareholders in difficult market conditions”, adding that it had “acted at all times in the best interests of the wider shareholder base”.

Colfax is offering 730p in cash and 0.12 new shares per Charter share.

“The risk to this transaction proceeding now only really centres on whether the large UK institutional holders of Charter are happy to sell out for cash (and a small bit of US-listed stock) or not,” said Mark Kelly at Olivetree Securities.

For merger arbitrage funds – those investors that bet on gains made as a result of M&A – the news will be positive.

In recent days, a growing proportion of Charter’s share register has been made up of hedge funds and arbitrageurs. About 30 per cent of the shares were estimated to be held by hedge funds who would be able to hold US stock. Previously about half of Charter’s shareholders would have been unable to accept Colfax’s offer since they are restricted from holding US stock.

“Many in the arb community will see this as good news – there was a real risk that any Melrose offer might have been worth less than the existing offer from Colfax,” said Mr Kelly.

Charter shares closed up 1.6 per cent on Tuesday at 868p.

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