Melrose makes a threadbare offer
GKN shareholders have reason to thank engineer Melrose for its unwanted attentions. The hostile £ 7.4bn bid and charm offensive provides a sharp remainder of how, even during robust bull markets, there are companies with innovative technology where value is left behind.
It found itself in an unusual space because it is one of the few auto parts suppliers left in the FTSE 100 after the sector was devastated by past failures of British car making.
The two big issues for GKN shareholders, faced with taking Melrose paper and cash, will be price and perceived quality of management. Melrose has produced a splendidly upbeat offer document, which focuses on triumphs in turning around underwhelming engineers.
On price, the premium offered for GKN is melting down as Melrose stock has fallen. At 30pc, it is decidedly meagre. There can be no assurances that Melrose hasn’t been overhyped and, as investors in the outsourcing companies found, the more fashionable the share the further it has to fall.
Then there is the management of the two groups. No one will dispute that Melrose’s top team, headed by Christopher Miller, is full of confidence in its ability to deliver better margins through cost-cutting and bold accounting. But Melrose is not infallible.
It has just acknowledged to the stock market that it is struggling with oil and gas offshoot Brush, which it took on when it bought engineer FKI in 2008. It has written down the investment by £300m and will be axing 270 jobs.
The Brush write-off is more than twice the £120m accounting farrago at GKN’s aerospace plant in Alabama which was one of the triggers of Melrose’s opportunism. By pledging to declutter at GKN the predator paints a picture of a ramshackle edifice badly in need of hygiene. This is unfair.
Under successive chief executives, and now under Anne Stevens, GKN has reorganised by moving production closer to vital aerospace and car customers.
Within main divisions, clearly, there will be underperforming assets and veteran Ford executive Stevens aims to weed them out as she seeks more separation between aerospace and motor components.
Indeed, GKN may eventually decide to demerge but that will require careful analysis of pension and tax implications. The company is acutely aware of the covenant with the GKN pension trustees.
Melrose suggests the pensions shortfall may be exaggerated but we have had too many examples of retirement liabilities being underestimated to take anything for granted. Investors should put their faith in the long-term future of GKN as currently constituted.
The rest is promises, promises...
Dutch courage
WHEN it comes to unfriendly bidders Unilever’s Paul Polman is a champion, having seen off Kraft Heinz a year ago.
Since then the Unilever chief has been racing to fulfil pledges to stakeholders. Flora and other spreads have been ditched and lost sales have been replaced by new, trendier ranges. Brazil has come good and ecommerce in China is taking off. In the final quarter, sales and margins beat what analysts projected.
Two big decisions are still to be taken. A successor is being sought for Polman who expects to leave office after ten years at the helm. Internal candidates have been set some tasks but the company is also thinking about whether its next chief executive should have the ecommerce and digital skills to disrupt a staid industry.
The second big challenge is sorting out domicile. Whether Britain or the Netherlands wins out, Unilever’s signature building at Blackfriars in London remains core, as operations are focused on three main divisions: food and refreshments, home care and personal care.
The HQ of a couple of these could be the UK’s consolation should Unilever go Dutch. One would expect the share quote to remain on London’s markets, whatever happens.
Polman has demonstrated that tired companies can take on hipster brands such as Pukka Herbs and Dollar Shave Club and make them work.
Proost!
Cash gusher
AMAzING what a short burst of higher oil prices can do for Shell with the AngloDutch group generating £25.7bn in 2017, enough to comfortably cover a big capital spend of £15bn and a cash dividend.
Shell was assisted by chief executive Ben van Beurden’s bet on BG, which generated £3.2bn or so of benefits – way beyond what was pledged.
Time perhaps to increase exposure to greener technologies.