The engineering group FKI has opened its books to Melrose, the investment group focused on UK industry, which raised its takeover offer by a fifth to £500m, as rival suitor Blackstone Group continues to weigh up a counter-bid on the sidelines.
FKI announced yesterday it had received an indicative 85p per share offer, up from 70p per share lodged earlier this year. The offer is in cash and shares and includes a special dividend.
It said in a statement: "On the basis of this revised indicative offer, the company has granted Melrose due diligence access and will update the market in due course as appropriate." FKI's share price rose almost 7 per cent on the news to 77.75p.
Following news that Melrose had returned to the table, a source close to the bid commented: "There is a good underlying operation at FKI with a cash generative business. It has faced problems including operating under financial restrictions, and management limitations."
Melrose's strategy is similar to that of a private equity firm. It targets struggling businesses, with a view to overhauling them and selling them on within five years.
The private equity group Blackstone, which has been running the slide rule over FKI in the past few months, is yet to make a firm offer. The company is understood to still be considering an approach, although it declined to comment yesterday.
Melrose's offer still represents a significant discount to the price mooted for the group last year. FKI was approached in May by an unnamed suitor, over a deal worth £765m. After months of negotiations the deal collapsed in August, sending the engineer's shares spiralling.
Earlier that year FKI's share price had peaked around the 140p mark. As the deal fell apart, combined with the group announcing a profit warning and the onset of the turbulent market conditions, the shares slumped as low as 43.25p in January.
The group has significant debt issues, with a revolving credit facility coming up in April 2009, as well as its €600m bond, which has a redemption date of 2010. One source close to the talks said its cash-flow issues had hampered the group's development and forced it to put its Logistex and Hardware businesses on the block.
Harry Phillips, analyst at Evolution Securities, said: "FKI has too much debt and their strategy has been to attempt to sell two businesses to pay down debt to manageable levels. The problem is that while both operations are solid, they have suffered hugely this year because of the weakness of the markets they operate in."
Mr Phillips added that this latest bid offered a real opportunity for both Melrose and FKI shareholders. "Melrose can sort out the debt structure and employ a different strategy to the current one, which was to sell the two weaker businesses into a falling market."