UPDATE 1-GKN dismisses Melrose hostile bid premium as "fake"

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Jan 18 (Reuters) - British engineering group GKN dismissed Melrose's 7.4 billion pound ($10.2 billion) hostile bid as "misleading" on Thursday.

GKN rejected turnaround specialist Melrose's bid on Wednesday, saying that the terms of the paper-and-cash offer "effectively unchanged" from a first private approach on Jan. 8, which GKN also spurned.

"GKN's Board considers 32 percent to be a fake premium. Melrose's market capitalisation on 5 January was significantly smaller than GKN's on the same day ... and Melrose brings no industrial synergies," it said on Thursday.

"The true, delivered premium is less than 11 percent," GKN, which has since set out plans to split its aerospace and automotive businesses, added.

Melrose pounced on GKN after problems at the engineering firm's aerospace division led to profit warnings in October and November, sparking a sharp share price fall.

The offer, of 1.49 new Melrose shares and 81 pence in cash for each GKN share, was worth 430.1 pence based on Melrose's closing price on Jan. 16.

Melrose's shares have risen since Jan. 5, the day before it approached GKN's board, increasing the value of its bid.

GKN's shares also jumped after it made public its rejection of Melrose's approach on Jan. 12, but Melrose calculated its 32 percent premium based on GKN's undisturbed price on Jan. 5, a calculation that GKN said was misleading.

GKN said that while Melrose is proposing to fund 80 percent of the offer in shares, GKN's shareholders are themselves funding the majority of the premium.

Melrose's business model is to buy engineering companies, improve their margins and resell them.

It owns the diversified Nortek and the Brush electricity generating equipment businesses, and has a market capitalisation of around 4.6 billion pounds. GKN is currently valued at 7.7 billion pounds. ($1 = 0.7238 pounds) (Reporting by Noor Zainab Hussain in Bengaluru; Editing by Paul Sandle and Alexander Smith)