Adds context and background throughout

By Yadarisa Shabong

Jan 29 (Reuters) - Detroit-based American Axle and Manufacturing $(AAM)$ AXL.N will buy GKN Automotive owner Dowlais DWL.L in a cash-and-stock deal, valuing the London-listed firm at about 1.16 billion pounds ($1.44 billion), the companies said on Wednesday.

Dowlais shares were up 8.6% to 74.5 pence at 0854 GMT.

The deal values Dowlais, maker of driveline systems and other automotive parts, at 85.2 pence per share, a premium of nearly 25% to the stock's close on Tuesday.

The combined group aims to benefit from greater scale as the auto industry grapples with volatile demand for electric vehicles, economic uncertainties and the global expansion of Chinese EV makers.

Dowlais, which operates in more than 20 countries, is set to join a growing list of takeovers as foreign companies take advantage of UK firms' relatively cheap valuations.

GKN, a mainstay of British engineering, has changed hands multiple times since 2018, when Melrose Industries MRON.L won a hostile bid to buy the company for 8 billion pounds.

In 2023, Melrose spun off GKN's automotive and powder metallurgy businesses by listing Dowlais - named after the village in South Wales where GKN was founded.

Its London-listed shares, which achieved a market value of about 1.5 billion pounds when it listed in April 2023, have lost more than 40% of their value since the spin-off.

Over the past year, Dowlais has seen a fall in revenues, with its ePowertrain business hit by a subdued EV market.

The two companies offer a range of automotive parts supporting internal combustion engines, hybrid and electric powertrains. AAM expects synergies of $300 million by the end of the third year after the deal closes.

A joint statement said they expected shareholders of the U.S.-based company to hold 51% of the combined entity, with Dowlais shareholders owning approximately 49%.

The deal is expected to close this year subject to shareholder and regulatory approvals including from the European Union, United States, and China, where Dowlais operates a joint venture.

(Reporting by DhanushVignesh Babu, Aby Jose Koilparambil and Yadarisa Shabong in Bengaluru. Editing by Barbara Lewis and Mark Potter)

((DhanushVignesh.Babu@thomsonreuters.com;))