GKN PLC Share News (GKN)

By Kate Holton

LONDON, March 27 (Reuters) - Melrose on Tuesdaycommitted to a five-year ownership of GKN's Aerospacedivision if it succeeds in its hostile bid for the engineeringcompany after the British government made a rare intervention inthe high-profile takeover battle.

Wading in to a corporate fight that has split investors,Business Minister Greg Clark wrote to Melrose to say the timehad come for the turnaround specialist to prove that its hostile7.9 billion pound ($11.17 billion) bid would not damage thecountry's defence capabilities or GKN itself.

Britain touts itself as having one of the most openeconomies in the world but it has toughened its takeover rulesto force bidders to stick to the promises made during bidbattles following a public backlash.

Clark said he intervened due to GKN's role at the heart ofBritain's autos and aerospace industries and as a recipient ofgovernment-sponsored and defence-related contracts.

"In this case I am also mindful of the business model whichMelrose operates and its history of acquiring, improving andselling businesses," he wrote.

"Whilst this approach can have an important and beneficialrole to play, tensions could arise between this approach and theneed for long-term investment and stability."

In response, Melrose said it would keep the Aerospacedivision of GKN for at least five years and would increasespending on apprentices and research and development by makingan innovation centre near Oxford a global centre of excellence.

Melrose said it hoped this would reassure the government.

The new pledges from Melrose mark the latest twist in atakeover battle that has turned into a tit-for-tat spat withboth sides talking up their offers as they seek to secure thebacking of investors, customers, pension trustees, unions andgovernment.

Investors have to choose between the Melrose deal and GKN'splan to merge its autos business with U.S. group Dana.They have until 1200 GMT on Thursday to decide.

Melrose Chief Executive Simon Peckham wrote in a reply toClark that Melrose was focused on improving the good butunderperforming businesses it acquires.

"We invest in R&D. We invest in our people, in skills andtraining. We boost productivity. It is partly through thisinvestment that we make the operational improvements andproductivity gains that are central to our strong track record."

HOSTILE MOVE

GKN, a mainstay of Britain's engineering sector, makes partsfor the U.S. aviation industry, such as the Boeing 737 jet andBlack Hawk helicopter, as well as components for Volkswagen andFord cars.

The hostile Melrose bid has prompted criticism frompoliticians who are concerned that after improving GKN, Melrosecould break it up and sell parts to foreign buyers.

Britain's right-leaning press have championed GKN'smanagement, calling on the government to prevent "vultures" frombuying a company that helped make Spitfire fighter aircraft inWorld War Two.

Melrose said in its response to Clark that it reserved theright to list the Aerospace division on the stock market andalso said that were it to be approached by a buyer in the fiveyear period, it would seek the approval of the government tosell.

It also said its commitment to spend at least 2.2 percent ofsales on research and development should be seen as a "floor,not a ceiling on our ambitions".

In its defence against Melrose, the more than 250-year-oldGKN has developed a plan to improve its operations, return cashto shareholders and merge its autos business with Dana to createa standalone company listed in London and the U.S..

On Monday, Dana increased the cash portion of its bid forGKN's Driveline auto business by $140 million.

Two of GKN's biggest investors are on opposing sides in thebattle, with Elliott Advisors and its 3.8 percent interestbacking Melrose, while Columbia Threadneedle with a 3.4 percentstake is backing GKN's plan.

($1 = 0.7074 pounds)(Reporting by Kate Holton; Editing by Alistair Smout and JaneMerriman)