THE odds on Edinburgh-based John Menzies completing a controversial plan to merge its newspaper and magazine distribution business with DX Group appear to have lengthened after an activist investor stepped up its attack on the proposal.

Gatemore Capital Management said the planned reverse takeover of Menzies Distribution grossly undervalued DX and revealed it had put itself in a stronger position to block any deal.

London-based Gatemore announced it had increased its holding in DX group to 21 per cent from 11per cent following a private acquisition.

It said the increase in its stake meant the holders of 28 per cent of the shares in DX had spoken out against the deal.

News of the stake building came three weeks after Gatemore and three other investors in DX wrote to the company saying directors should significantly improve the terms of the deal with Menzies or end talks about it.

The intervention will focus attention on a potential deal that would allow Menzies to address longstanding calls by critics for the group to separate its distribution and aviation support businesses.

In March, Menzies and Slough-based DX said they were in talks about a combination that had strong strategic logic for all stakeholders.

Claiming DX would fare better as a stand-alone business, Gatemore made a stinging attack on the proposed deal yesterday.

“From the perspective of Menzies, we understand why they are looking to unload their distribution business,” said managing partner Liad Meidar.

“But as DX shareholders, we are not interested in having our shareholdings diluted by 80 per cent and taking on additional indebtedness and pension liabilities in order to acquire a declining business.”

The Menzies distribution business has been impacted by falling sales of print editions of some newspapers and magazines.

John Menzies said recently that sales fell 3.1 per cent in the distribution business in the first four months of the year compared with the same period in 2016. The overall fall was in line with directors’ expectations but the rate of decline in the magazine market was sharper than expected.

But Menzies thinks the growth of internet shopping has provided opportunities to develop new activities which would allow more effective utilisation of the depots and vans it uses to distribute newspapers overnight.

John Menzies and DX Group made no comment on Gatemore’s latest attack.

After Gatemore sent the letter to DX criticising the proposed distribution tie up earlier this month to DX, the logistics group’s chairman Bob Holt said the board had the support of key shareholders to progress discussions with Menzies.

It continued to believe that a potential combination of DX with Menzies’s distribution division offered strong benefits.

Menzies and DX would be obliged to make announcements to the stock exchange if talks about the potential deal had ended.

Any formal proposal would require approval by shareholders in both firms.

When the planned deal was announced on 31 March Menzies’s company secretary and corporate affairs director John Geddes noted the rationale for keeping its aviation and distribution businesses had weakened in recent years.

The aviation business can support itself without the cashflow generated by the distribution arm.

The planned deal would see DX pay £60 million to Menzies, whose shareholders would be in line to receive 75 per cent of the shares in the enlarged distribution business.

It is expected that around 17 per cent of Menzies’ defined benefit pension scheme would transfer to the enlarged DX group. The pension scheme would get five per cent of the shares in DX.

Menzies shareholders would retain control of its aviation support business.

The letter sent to the DX board was signed by Gatemore, the Hargreave Hale and Downing investment businesses and Lloyd Dunn.

Shares in John Mezies closed down two per cent, 12.5p at 712.5p.

They closed up three per cent at 678p on the day the talks with DX were announced.

Trading in DX shares was suspended on Aim on 31 March after the announcement of the deal talks.