(Reuters) - The 7.4 billion pound hostile bid for British engineering group GKN (LON:GKN) from Melrose Industries is "low price and high risk" and undervalues the company, GKN Chairman Mike Turner said in a letter to shareholders.
Turner said Melrose had a short-term business model which was inappropriate for GKN.
GKN, which makes parts for the Boeing (NYSE:BA) 737 jet, Black Hawk helicopter and components for Volkswagen (DE:VOWG_p) and Ford cars, said its plan to separate its aerospace and automotive divisions is expected to deliver a 340 million pounds recurring annual cash benefit from the end of 2020.
All of that benefit would be passed on to GKN shareholders, Turner added in the letter.
GKN pledged on Wednesday to return 2.5 billion pounds to investors over the next three years, stepping up its efforts to fend off the hostile bid.
Melrose made a firm offer to buy GKN on Jan. 17, valued at 430.1 pence per share or 7.4 billion pounds, which GKN swiftly rejected.
Melrose's offer for GKN consists of 1.49 new Melrose shares and 81 pence in cash for each GKN share.
Melrose, whose business model is to buy engineering companies, improve their margins and resell them, already owns diversified firm Nortek and the Brush electricity generating equipment businesses.
Melrose has some experience of aerospace after buying McKechnie, a manufacturer of aerospace components, and Dynacast, which makes small precision components, in 2005. It sold its aerospace and aftermarket businesses in 2007.
Hitting back at Melrose, Turner said GKN is six times the size of Melrose's largest previous acquisition, adding that the Melrose board lacks relevant experience at board level in several critical areas.
Turner reiterated GKN's recommendation to shareholder to take no action in relation to the Melrose offer, saying the bidder is more focused on financial engineering than real engineering.
GKN shares were up 1.5 percent at 417.4 pence by 0803 GMT.