Melrose comes up short

BIg battalion investors who backed Melrose Industries in its takeover of engineering group gKN may be getting a trifle impatient.

Melrose boasts a private equity model, and in exchange for huge rewards for the panjandrums in charge, promises ‘to buy, improve and sell’ companies.

Chairman Christopher ‘Jock’ Miller, chief executive Simon Peckham and chums managed to get over the line when bidding for gKN with last-minute assistance from Legal & general. But the improvement and selling for which they are so renowned is proving more troublesome than hoped.

gKN’s Powder Metallurgy enterprise was always seen as easiest to offload. Indeed, gKN offered to spin it off as part of its defence strategy. But potential buyers have baulked at the £2bn price tag placed on it by Melrose, and the highest bid was £1.6bn.

If the purchaser were to have come from overseas, there may also be questions about national security. Some of the powders produced are used to coat military aircraft to deflect radar and sonic tracking.

It wouldn’t be so bad for Melrose were it just Powder Metallurgy giving it trouble. But the difficulties of the global motor industry are also unsettling. The decision of general Motors to axe production in Ontario and cut its range of models as the internal combustion engine runs into difficulty means problems for gKN’s automotive division, which makes the drive shafts for up to 50pc of the world’s cars.

gKN has developed advanced technology for electric cars, but getting it off the test tracks and into production will be a big investment. That is not what investors anticipating quick cash payouts from Melrose were hoping for.

Meanwhile, Melrose’s previously poor performer Brush is unlikely to be helped by the volatility in the oil and gas market. Surging US fracking, together with a fast-moving motor market, is rapidly changing the economics. The apparently impeccable management of Melrose is finding it far more difficult to run a complex FTSE 100 firm than it thought.

No one wants to see Miller, Peckham and company beached. After all, there is valuable UK technology, r&D, exports, overseas earnings for UK plc and jobs at stake.

But the drop in the share price, down 2pc yesterday, tells its own story.

Loose change

AMONg the reasons why UK-focused fund managers generally fall over themselves when takeover bids come along is the desperation for performance.

with the exception of a few analytical investors such as Terry Smith at Fundsmith, returns have been elusive and cash has been fleeing British shares.

Data provider EPFr (part of the Informa digital publishing group) calculates that $1 trillion (£796bn) has fled Britain since the June 2016 referendum. The outflows reached a peak of $19.4bn (£15bn) in the week that Theresa May brought home her draft Brexit deal to Cabinet.

More evidence of the disgruntlement with shares comes from fund manager Polar Capital, which reports total assets fell 7.5pc in October.

As a specialist in tech stocks, Polar has been hard hit by the Silicon Valley correction. Nevertheless, over the past six months its profits soared 81.6pc.

Many will attribute the fund outflows to Brexit, which is almost certainly partially true. But UK shares, like those worldwide, have been hurt in the past year by the gradual rise in US interest rates which has made treasuries very attractive and seen dollars flow back to America from the rest of the world.

There could be a silver lining in this. Many asset managers and hedge funds have already re-organised their portfolios for a worst-case Brexit. So the idea that rejection of Mrs May’s text by the Commons will ignite a market collapse of financial crisis proportions seems far-fetched. Defensive actions already have been taken.

Vaccines for life

ONE of the legacies of the Jean-Pierre garnier era (2001-08) at glaxosmithkline was the recognition that the pharma company has a world-leading vaccines operation.

Among other things it developed Cervarix, which could eliminate cervical cancer. gSK also is ahead of the game with its meningitis vaccine Bexsero.

Next on the production line could be a gonorrhoea vaccine at a time when rates of infection are climbing steeply and are increasingly resistant to antibiotics. This could be another breakthrough for Britain’s vibrant pharma sector.