ANALYSIS-Melrose’s "Project Golf" bid for GKN beats engineer’s “Damson” defence

* Melrose first contacted GKN’s brokers about bid on January5

* Both sides only met once during three-month battle

* GKN investors narrowly back Melrose takeover

By Ben Martin

LONDON, March 29 (Reuters) - The opening salvo in what wouldbecome a three-month battle for British engineer GKN wasfired by Melrose's chief executive over the telephone.

On Friday January 5, Simon Peckham rang GKN's advisers at JPMorgan to arrange a meeting with the FTSE 100-listed aerospaceand automotive parts supplier.

The gathering took place the following Monday at theinvestment bank's offices next to the River Thames atBlackfriars in London, according to a source.

It was there that Peckham and Melrose executive chairmanChristopher Miller made their first takeover proposal to AnneStevens, the 69-year-old former Ford executive who was interimCEO of GKN, and the engineer's chairman, Mike Turner.

The cash-and-shares bid valued the engineering company at7.4 billion pounds ($10.4 billion) and was dubbed "Project Golf"internally by UK-based industrial turnaround specialist Melroseand its advisers.

The codename was a reference to the model of carmanufactured by Volkswagen, which is one of GKN's biggestcustomers, a person with knowledge of the matter told Reuters.

The meeting between the four executives lasted for an hourat most, sources familiar with the situation said.

It marked the only time in the fierce battle that followedthat executives from Melrose and GKN would speak to each other,in what quickly escalated into Britain's biggest hostile bidsince Kraft pounced on confectionery giant Cadbury in 2009.

The initial bid was swiftly rejected by GKN, which made theapproach public on January 12, when it also appointed Stevenspermanently as CEO and disclosed it was examining an alternativeplan to demerge its main aerospace and automotive divisions.

At the time, GKN dismissed the Melrose offer as being"entirely opportunistic" and "fundamentally" undervaluing theengineer.

WAR OF WORDS

That set the tone for an acrimonious war of words betweenthe two companies that lasted right up until the takeoverbattle's denouement this week, when Melrose, which is alsoLondon-listed, finally clinched a takeover.

To win the fight, Melrose had to offer a better deal toshareholders than a rival tie-up with U.S. firm Danathat GKN struck earlier this month. The Dana transaction wascodenamed "Project Damson", after a type of plum tree, byStevens and her team, according to a source.

It was a narrow victory for Melrose, which had set adeadline of 1200 GMT on Thursday for GKN investors to back itsoffer.

When the deadline expired, Melrose had received acceptancesfrom 52.4 percent of GKN shareholders. That just exceeded theacceptance threshold of 50 percent plus one share that Melrosehad set.

Indeed, the fight between the two companies had become sofinely balanced in its latter stages that even an adviser toMelrose conceded to Reuters earlier this week that he wasanxious about the outcome.

"I'm confident but it would be wrong of me to say I'm notnervous," said the adviser, who declined to be named.

The Melrose team, which included bankers from Rothschild,RBC Europe and Investec, endured not just months of criticismfrom GKN but scrutiny from British lawmakers, a U.S.congressman, regulators, the Unite trade union, GKN shareholdersand Airbus, which is the engineer's largest customer.

The political attention was driven by GKN's participation inU.S. and British defence programmes and worries about the statusof its 6,000 British employees and their pensions following aMelrose takeover.

This is because the turnaround specialist sells companiesonce it improves their performance, a strategy that fuelledconcerns about jobs and the possibility an overseas buyer couldacquire GKN's sensitive aerospace business.

Since listing on London's junior Aim market 15 years agowith net cash of just 12.7 million pounds, Melrose has growninto a business with a market value of more than 4 billionpounds.

It typically owns the firms it buys for three to five years.GKN is its biggest deal yet.

The aerospace and automotive components business isconsidered a mainstay of Britain's engineering sector, tracingits roots back more than 250 years to an ironworks in SouthWales. During the Second World War, its Hadley Castle site inShropshire produced Spitfire fighters that won the Battle ofBritain.

Today, GKN employs more than 58,000 staff around the worldand supplies parts for vehicles and aircraft including thePorsche 918 Spyder supercar, the Blackhawk military helicopterand the Eurofighter Typhoon.

DANA APPROACH

Two profit warnings in October and November caused byproblems at GKN's North American aerospace business, which sentits shares tumbling and prompted the departure of the executiveoriginally selected to be its next CEO, gave Melrose the openingto launch its bid.

However, Melrose was not the only company to seize on theopportunity.

Late last year, U.S. axles and driveshafts maker Dana alsoprivately approached GKN.

The British company and its advisers, which includedGleacher Shacklock, JP Morgan and UBS, started behind-the-scenestalks with the Ohio-based business early this year.

The resulting agreement between GKN and Dana would form thecenterpiece of the engineer's defence against Melrose.

Having already disclosed plans to split itself up, on March9 GKN announced a cash-and-shares deal to merge its automotivebusiness with Dana.

Along with a pledge to find a buyer for its powdermetallurgy business and return as much as 2.5 billion pounds incash to shareholders, this would leave GKN purely focused on itsaerospace business.

Melrose quickly responded on March 12 by raising its offerto 1.69 new shares and 81 pence in cash per GKN share anddeclaring it bid “final”.

This gave GKN investors a choice: accept a deal that handedthem 60 percent of Melrose and valued GKN at about 8 billionpounds, or back the engineer's management and take a 47.25percent stake in Dana, which pledged to take a listing in Londonalongside its New York listing.

In the end, a slim majority supported Melrose.

"There's a lot of disappointed people at GKN at the moment,"an adviser to the engineer said on Thursday evening.($1 = 0.7126 pounds)(Reporting by Ben Martin; Editing by Adrian Croft)