Daimler and Rolls-Royce bid for Tognum engines seen low

FRANKFURT (Reuters) - Germany's Daimler and Britain's Rolls-Royce may have to raise their offer for Tognum after the industrial engine maker dismissed a joint 3.2 billion euro ($4.4 billion) bid as too low.

While Tognum said on Wednesday there was a deal in principle, it warned that price was a sticking point, raising expectations that the powerful industrial duo would have to improve their 24 euro-per-share cash bid.

Tognum shares had jumped by 6.6 percent to trade above the offer at 24.75 euros by 1204 GMT, reflecting market hopes of a better offer.

If they succeed with the joint takeover, Rolls-Royce will expand its marine and diesel power business, while Daimler secures ties with a major buyer of its truck diesel engines, which are retooled by Tognum for other purposes.

The two hope to tap into a global market worth more than 30 billion euros a year that is growing at above-average rates.

However, car and truck manufacturer Daimler and engine maker Rolls-Royce clearly still have some work to do to win over Tognum's management, which holds about 10 percent of the company's stock, to agree to the offer price.

Tognum shares sold for 24 euros each in the company's initial public offering (IPO) in 2007. And although Daimler and Rolls-Royce are offering a 30 percent premium to last week's closing Tognum price, the bid offers no gain for investors or managers who have held the stock since the IPO.

Equinet analyst Holger Schmidt said the offer price could be raised as it was only 14 percent above the 21 euro fair value of Tognum's shares. WestLB had said earlier this week it expected a bid at 25-30 euros per share.

Daimler Chief Executive Dieter Zetsche played down any differences over price, stressing instead Tognum's overall willingness to do a deal.

"It's very normal in such a transaction that you won't expect a specific endorsement by the management as far as the value is concerned," Daimler Chief Executive Dieter Zetsche said during a conference call.

"And I think that's not their role. There is no disagreement but in the whole rest of the issues we have full agreement."

DIESEL POWER

The offer is contingent on Daimler and Rolls-Royce gaining control of at least half of Tognum's equity plus one share, a relatively low threshold considering the German carmaker already holds 28.4 percent.

Daimler once owned all of Tognum but sold it to Swedish private equity group EQT for 1.6 billion euros in equity and debt in December 2005. It then bought back more than 20 percent in April 2008, the year after its former unit went public.

"The combination between Tognum, Rolls-Royce and Daimler makes sense to us as the full product spectrum of diesel engines and gas turbines can be offered and global service networks can be combined," BHF Bank analyst Stefan Augustin said.

"Some savings in the supply chain and logistics are possible as well."

Rolls-Royce Chief Executive John Rose said during the conference call the goal was not to boost the bottom line with cost benefits.

"The real prize is all about capturing the top-line growth and i have no doubt that this joint venture will do just that.

Tognum is expected to report revenue growth of 10 percent this year and 8 percent in 2012, according to Thomson Reuters I/B/E/S estimates.

The companies said they plan to maintain current manufacturing sites and were confident their growth strategy will secure jobs.

As part of the deal, Rolls-Royce will contribute its Bergen marine and auxiliary-power engine business.

(Reporting by Christiaan Hetzner, Philipp Halstrick, Alexander Huebner; Editing by David Holmes and Alexander Smith)