Ben Marlow Turnaround wizards now have to show their magic
Turnarounds don’t come easy, not even for the self-professed masters, when the world has gone to hell in a handcart. At Melrose Industries, the results aren’t even ordinary, or just quite bad, they’re positively dire. True, it specialises in oldfashioned industrial businesses that are heavily exposed to the oscillations of the world economy but you are what you eat.
Indeed, it would be hard to invent a company more vulnerable to the global pandemic than GKN, its largest investment by a long shot, and a supplier of parts to the aerospace and car-manufacturing industries. Melrose then, can consider itself unfortunate but you could also say that it has been incredibly short-sighted.
One of the cardinal rules of engineering is to avoid single points of failure. That means there shouldn’t be any one thing that can go wrong and break the system.
You would think an engineering specialist would know this but Melrose looks to have broken the mantra emphatically by betting the farm, or the best part of it, on one huge deal, just as we headed into the most severe downturn in a century.
The bulk of Melrose comprises three former GKN businesses, acquired for £8bn after one of the most controversial takeover battles in recent memory, a tussle that triggered a parliamentary inquiry and led to Melrose being repeatedly dismissed as asset-strippers.
It is also the main reason why Melrose has sunk much deeper into the red, posting pre-tax losses of £685m in the first six months of the year alone, compared to £109m for the same period last year.
The company will point to a £56m profit at the operating level but how about this for a jumbo jet full of one-off charges: £263m of amortisation costs; a £179m writedown, largely on GKN’s aerospace arm; £99m of restructuring fees, again at GKN; and an £89m currency hit at, you guessed it, GKN.
Turnover across the group plunged by more than a quarter to £4.1bn with sales expected to crater by a third at GKN’s aerospace arm by the end of the year, having already fallen by that much at its automotive and materials units.
Justin Dowley, the chairman, isn’t wrong when he says “these are extraordinary times” but shouldn’t an outfit that comes with a planet-sized reputation for steering businesses through tough times be able to navigate through this too?
Melrose makes the point that its lofty “Buy, Improve, Sell” strategy worked during the last global crash. True but that was a financial crisis. This is a crisis of everything – almost every sector of the economy is experiencing the deepest downturn ever.
It would certainly be the perfect opportunity to justify the eye-watering bonuses lavished on the firm’s top four bosses in 2018 – £170m between the top four.
There’s the odd scrap of comfort – trading in the car industry and at air-conditioning maker Nortek has been at the higher end of expectations in recent weeks and R&D spending has been kept at £100m a year.
Still, that won’t be much consolation for the thousands of people that are expected to lose their jobs at GKN’s aerospace arm.
Apparently Melrose is “excited about the opportunity” to show that its model “will once again deliver”, maybe not in the usual three to five-year time-frame but still in “five to seven years” predicts boss Simon Peckham.
There will certainly be no shortage of chances.
Sorry state of affairs
When is an apology not an apology? When it’s coming from energy giant SSE.
The company has received a second regulatory fine in the space of a fortnight, this time for failing to disclose a deal that boosted the UK electricity’s supply by 3pc.
The folk at SSE didn’t think the agreement was market sensitive despite the impact that it would have on wholesale prices.
SSE said that it “subsequently understood” that disclosure was required “at an earlier stage”. It went on to say that it would be “pressing regulatory authorities for additional guidance going forward”.
Essentially then, the real culprit wasn’t SSE for not understanding the rules, but the watchdog for not explaining things properly. That’s quite the interpretation from an outfit that has received more than £3m of penalties in just two weeks.
After Tesco announced it was hiring another 16,000 people to cope with a leap in online orders, Amazon is creating another 7,000 jobs, on top of 3,000 new positions unveiled earlier in the year.
The naysayers will carp at the prospect of the Silicon valley giant adding to its ranks. Amazon has rightly been criticised for the conditions in its cavernous warehouses but surely any jobs are better than no jobs right now?
‘It would be hard to invent a company more vulnerable than GKN’