Melrose set to win £478m battle for FKI

Melrose, a private equity-style investor in the industrial sector, is claiming victory in the takeover battle for the beleaguered engineering group FKI, which yesterday recommended its £478m bid, as rival Blackstone hinted it could walk away.

It is understood that, even before the deal has been signed and sealed, Melrose has been approached by third parties interested in buying FKI's Logistex business. Melrose declined to comment.

Melrose and FKI released a joint statement yesterday, saying they "are pleased to announce that they have reached agreement on the terms of a recommended proposal".

The cash and shares offer, worth 81.3p per share, sent FKI's stock up 8.6 per cent to 84.5p, also helped by rumours Blackstone would make a higher offer. The private equity house was rumoured to have made an informal £764m bid last year, but the deal collapsed with the onset of the credit crunch. It has been evaluating a renewed assault in the wake of Melrose's bid, but it is understood interest has waned. Blackstone declined to comment yesterday.

Harry Philips, an analyst at Evolution Securities, said a straight cash offer was unlikely to match Melrose's cash and shares deal. "Melrose's bid offers FKI shareholders a route to unlocking value from the asset," he said. "Shareholders here want the equity to participate in the future of FKI and realise its potential value."

To finance the deal, Melrose is to raise £291m through a placement of 200 million shares, underwritten by JP Morgan and Investec. It will also refinance the crippling debt that has hampered FKI's growth with a £750m facility backed by six banks.

The Melrose source said: "The problem with FKI is that it has had the Sword of Damocles hanging over its head in the form of its debt, which has prevented it from investing in growth strategies. Melrose will remove that debt burden and provide welcome investment in FKI."

Shares in Melrose, which was advised by JP Morgan Cazenove and Dresdner Kleinwort, jumped 8.7 per cent at the close to 162p.