GKN unveils break-up plan as it fends off £7bn bid
After rebuffing a £7bn bid from Melrose, the plane component engineer must sell its vision for the future, write Jack Torrance and Alan Tovey
FTSE 100 engineering giant GKN unveiled plans to split itself in two yesterday after rejecting a £7bn takeover approach from turnaround specialist Melrose.
GKN’S shares soared 26pc after it revealed the approach, which follows two profit warnings and the departure of its incoming chief executive last autumn. The proposed deal forced GKN’S board to disclose its own turnaround plans, including a separation of its automotive and aerospace businesses, measures to improve margins and the appointment of interim boss Anne Stevens as permanent chief executive.
Melrose approached GKN on Monday with an offer of 1.49 new Melrose shares and 81p cash, which, based on last night’s closing prices, valued it at 420p a share.
But GKN said the “opportunistic” offer “fundamentally undervalues” its prospects. The City’s takeover rules mean Melrose has until Feb 9 to make a firm offer or walk away for at least six months. Melrose said it could “re-energise and repurpose GKN’S operations”, delivering more than £300m in extra profits annually.
A note from analyst Numis said: “Expect this saga to run with Melrose likely to return and GKN to issue updates on [turnaround plan] Project Boost. The question will be which management team do shareholders want to back?”
GKN’S shares were knocked in October and November as successive profit warnings due to problems in its North American business led to the dismissal of Kevin Cummings, its aerospace boss who had been lined up to take over as chief executive at the start of this year.
GKN also revealed yesterday that it traded in line with expectations in the final quarter of 2017 and expected full-year profits to be slightly higher than the previous year’s £678m, before accounting for write-offs in its North American arm. But it warned those write-offs were likely to be towards the upper end of an estimated £80m-£130m.
GKN’S shares closed up 26.2pc at 420p, while Melrose’s rose 5.8pc to 227.5p.
The directors of FTSE 100 engineering giant GKN face a battle to convince shareholders they can improve its performance after rejecting a £7bn takeover bid from turnaround specialist Melrose.
The proposal, revealed yesterday, hasn’t come out of nowhere and expectations are high that the turnaround specialist will fly by for a second attempt.
Melrose was first said to be mulling a takeover in early 2016 – though it denied it at the time.
But it seems the stars have aligned in recent months to make an acquisition of GKN, which makes parts for cars and planes, more palatable.
One of the reasons GKN hadn’t been snapped up sooner was its millstone of a pensions deficit, which stood at more than £2bn by the end of 2016. But it managed to cut its obligations to £1.8bn by last June and sweetened the pot further in July as it pledged to pay in £250m of cash and closed its defined benefit plan.
GKN, which can trace its origins back to a Welsh ironworks founded in 1759, has risen, since floating in 1995, to become one of the largest and most heralded industrial firms in UK plc. Its components feature in one in every two cars on the planet and it’s a supplier to most of the major aerospace firms including Boeing, for which it makes F-15 fighter jet frames.
But its shares have been on a downward trend since March and plunged in October, when it warned profits would be lower than expected after poor performance in its North American aerospace business. It was also hit with £40m of legal claims that outgoing chief executive Nigel Stein described as a “blow to the head”.
There was more bad news the following month as the company revealed further writedowns in its US business, which claimed the scalp of Stein’s planned successor Kevin Cummings, who was previously boss of its aerospace arm.
That left GKN on the hunt for a new chief executive just weeks before Stein was due to leave. The board of Melrose clearly thought now was the time to strike. “It became evident that GKN was really under-performing with all the shenanigans that went on at the end of last year, and therefore now [Melrose] could see the opportunity – both for turning it around and buying it at a sensible price,” says David Larkam, an analyst at Numis.
In rejecting Melrose’s approach, GKN’S board feels now is the time to spell out its own plan to turn things around – opting for a long-expected break-up of its automotive and aerospace divisions and making interim boss Anne Stevens permanent.
GKN has also unveiled “Project Boost”, a plan to fatten the company’s margins, which have long been its Achilles’ heel. A potential split could boost the value of each division.
“Clearly the strategy decisions to separate the businesses and implement a transformation programme were reached before the Melrose bid landed,” says Andrew Gollan, of analysts Berenberg.
“We have long said the GKN portfolio is undervalued and the sum of the auto and aero parts are under-appreciated.”
Melrose hopes to bolster GKN’S margins by cutting away what it sees as “bureaucracy” and putting more power into the hands of the managers that run its divisions.
Given the Government’s recent focus on industrial strategy it’s possible the deal could face political scrutiny. Sir Vince Cable, the Liberal Democrat leader, was quick to accuse Melrose of being in “the business of short-term financial engineering”.
Even at the rejected price of £7bn GKN would be by far the largest acquisition Melrose has attempted, dwarfing its most recent purchase – that of Us-based air conditioning and security products group Nortek for £2.2bn in 2016.
However Melrose management’s strong history of turnarounds – and paying huge returns to investors as it offloads the companies – means they will have little difficulty in funding the bid, which would be 80pc in shares and 20pc in cash.
Sources within Melrose have previously indicated that in the current “cheap money” environment, they have strong backing from lenders that gives them almost free rein to make offers.
The question is whether Melrose can convince GKN’S shareholders, who would own a majority of the combined business should the deal go ahead. It’s keen to pitch the takeover as a choice between placing the business in its own “experienced” hands or leaving it under the control of GKN’S existing leadership. Simon Peckham, Melrose chief executive, told The Daily Telegraph: “Shareholders now have the opportunity to choose between our proven management team or an uncertain future punctuated by a series of ‘jam tomorrow’ pledges from a company that has failed to deliver in the past.”
The turnaround firm has until Feb 9 to make a formal offer or it must wait six months before trying again.
Stevens, who made her name at Ford and was a non-executive director at Lockheed Martin for 15 years, faces a battle to persuade shareholders her sector-specific experience is what GKN needs to turn its fortunes around. She has a busy month ahead.
‘We have long said the GKN portfolio is undervalued and the sum of the auto and aero parts are underappreciated’