UPDATE 2-GKN chairman tells investors Melrose bid is 'low price and high risk'


* Chairman says Melrose business model inappropriate for GKN

* Hostile bid has attracted attention of British government

* GKN shares up 1.9 pct (Adds Melrose response, context, updates shares)

Feb 15 (Reuters) - The 7.4 billion pound ($10.4 billion) hostile bid for British engineering group 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 has a short-term business model that is inappropriate for GKN, criticizing a bid that has also attracted the attention of the British government because of the company's position as a leading engineering group and large employer.

With a market capitalisation of more than 7 billion pounds, GKN is a mainstay in the British engineering sector, generating close to 1 billion pounds of UK sales. The FTSE 100 company has British and U.S. defense contracts and employs more than 56,000 people worldwide, including about 6,000 in Britain.

GKN, which makes parts for the Boeing 737 jet, Black Hawk helicopter and components for Volkswagen and Ford cars, said its plan to separate its aerospace and automotive divisions is expected to deliver a 340 million pound 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. The offer consists of 1.49 new Melrose shares and 81 pence in cash for each GKN share.


Later on Thursday Melrose said that Turner's letter to GKN's shareholders did not change Melrose's stance on the offer.

"Today's document from GKN is another attempt to distract from the real issue," Melrose Chairman Christopher Miller said in a market annoucement, adding that Melrose would not cut corners in making necessary investment into GKN businesses.

Melrose said it would respond to GKN shareholders in detail in due course.

Melrose -- the business model of which is to buy engineering companies, improve their margins and resell them -- already owns diversified manufacturer Nortek and the Brush electricity generating equipment business.

It 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 1.9 percent at 419 pence by 1302 GMT. ($1 = 0.7117 pounds)

(Reporting by Rahul B in Bengaluru; Additional reporting by Ben Martin; Editing by David Holmes and David Goodman)