* GKN investors must choose between Melrose bid, Dana plan
* Dana deal would leave GKN less diversified - Moody's
* New GKN-Melrose spat breaks out over pension plans (Updates with pensions dispute, Moody's report)
By Ben Martin
LONDON, March 13 (Reuters) - The chief executive of U.S. firm Dana Incorporated is in London meeting top GKN shareholders in a drive to persuade the British engineer's investors to back a deal with Dana and reject a hostile bid by Melrose Industries.
GKN agreed a $6.1 billion deal on Friday to merge its automotive division with Dana, an Ohio-based maker of axles and driveshafts, hoping to fend off an unwanted takeover approach by Melrose, a UK-based industrial turnaround specialist.
Melrose responded by raising its cash-and-shares bid for all of GKN on Monday. The offer, which at the time valued the FTSE 100 engineer at 8.1 billion pounds ($11.3 billion), was declared "final", meaning it cannot be increased under Britain's takeover rules.
James Kamsickas, the Dana chief executive, is now in Britain to discuss the merits of the automotive deal with GKN's major shareholders, two sources familiar with the matter told Reuters.
The Dana CEO is expected to spend most of the week in Britain, one of the sources added.
It comes as the battle for the future of GKN, a mainstay of Britain's engineering sector, reaches its final stages.
GKN shareholders have two options. They can choose Melrose's bid of 81 pence in cash for each GKN share plus 1.69 new Melrose shares, a deal that will hand them a 60 percent stake in the London-listed turnaround specialist.
GKN investors have until March 29 to accept Melrose's offer.
Alternatively, they can back GKN's plan, which would give them a 47.25 percent stake in New York-listed Dana.
GKN, led by new CEO Anne Stevens, has also pledged to sell off its powder metallurgy business, which along with the Dana deal would leave the engineering group focused on the aerospace sector, supplying parts for aircraft including the Eurofighter Typhoon. It would then return as much as 2.5 billion pounds to its shareholders over three years.
Such a plan "would delever GKN, but weaken its business profile," analysts at Moody’s Investor Service warned in a March 12 report.
They argued that a deal with Dana would leave GKN as a "substantially smaller and less diversified" business.
Melrose has been pursuing GKN since January, when the fight between the two companies quickly descended into a war of words.
They clashed again on Tuesday over the future of GKN's retirement schemes following an intervention by the trustees of the engineer's pension plans.
The trustees said on Monday evening that they had held a number of discussions with Melrose about its takeover bid but had yet to receive proposals that addressed their "key concerns".
GKN said the trustees' statement showed Melrose was "not demonstrating a responsible approach to the serious issue of protecting the long-term interests of GKN’s pensioners."
Melrose's Executive Chairman Christopher Miller retorted that the turnaround specialist is "an exemplary custodian of pension schemes".
"We are working towards an agreement on the GKN pension schemes which will strengthen them and better protect GKN's pensioners," he said. ($1 = 0.7181 pounds) (Reporting by Ben Martin Editing by Adrian Croft)