Melrose makes five-year pledge to GKN after government intervenes

Melrose has committed itself to a five-year ownership of GKN’s aerospace division if it succeeds in its hostile bid for the engineering company after the British government made a rare intervention in the high-profile takeover battle.

Wading into a corporate fight that has split investors, Business Minister Greg Clark wrote to Melrose to say the time had come for the turnaround specialist to prove that its hostile £7.9bn bid would not damage the country’s defence capabilities or GKN itself.

Britain promotes itself as having one of the most open economies but it has toughened its take-over rules to force bidders to stick to the promises made during bid battles following a public backlash.

Clark said he intervened due to GKN’s role at the heart of Britain’s motor and aerospace industries and as a recipient of government-sponsored and defence-related contracts. “In this case I am also mindful of the business model which Melrose operates and its history of acquiring, improving and selling businesses,” he wrote.

“Whilst this approach can have an important and beneficial role to play, tensions could arise between this approach and the need for long-term investment and stability.”

In response, Melrose said it would keep the aerospace division of GKN for at least five years and would increase spending on apprentices and research and development by making an innovation centre near Oxford a global centre of excellence. Melrose said it hoped this would reassure the government.

Its new pledges mark the latest twist in a takeover battle that has turned into a tit-for-tat spat with both sides talking up their offers as they seek to secure the backing of investors, customers, pension trustees, unions and the government. Investors have to choose between the Melrose deal and GKN’s plan to merge its motor vehicle business with US group Dana. They have until noon on Thursday to decide.

Melrose CEO Simon Peckham told Clark that Melrose was focused on improving the good but underperforming businesses it acquires.

“We invest in research and development. We invest in our people, in skills and training. We boost productivity. It is partly through this investment that we make the operational improvements and productivity gains that are central to our strong track record.”

GKN, a mainstay of Britain’s engineering sector, makes parts for the US aviation industry, including for Boeing 737 jets and Black Hawk helicopters, as well as components for Volkswagen and Ford cars.

The hostile Melrose bid has prompted criticism from politicians who are concerned that after improving GKN, could break it up and sell parts to foreign buyers.

Melrose said in its response to Clark that it reserved the right to list the aerospace division on the stock market and also said that were it to be approached by a buyer in the five-year period, it would seek the approval of the government to sell.

Its commitment to spend at least 2.2% of sales on research and development should be seen as a “floor, not a ceiling on our ambitions”, it said.

In its defence against Melrose, the more than 250-yearold GKN has developed a plan to improve its operations, return cash to shareholders and merge its motor vehicle business with Dana to create a standalone company listed in London and the US. On Monday, Dana increased the cash portion of its bid for GKN’s Driveline vehicle business by $140m.

Two of GKN’s biggest investors are on opposing sides in the battle, with Elliott Advisors and its 3.8% interest backing Melrose, while Columbia Threadneedle with a 3.4% stake is backing GKN’s plan.

POLITICIANS ARE CONCERNED THAT AFTER IMPROVING GKN MELROSE COULD BREAK IT UP AND SELL TO FOREIGN BUYERS