The hostile £7.4bn battle for control of GKN, one of Britain’s oldest engineering groups, is expected to come to a head this week as the aerospace and auto parts manufacturer reports annual results, which could prompt a raised bid from predator Melrose.
GKN is scrapping for its life after rejecting the offer from Melrose, a corporate turnaround firm that specialises in buying unloved industrial assets, improving the financial returns and selling for a huge premium. Melrose has offered 1.49 of its own shares, plus 81p for every one of GKN’s shares. The mainly share-based bid would leave GKN investors with 57% of the enlarged group.
Simon Peckham, the chief executive of Melrose, is confident he can pull off a coup and break GKN’s resistance. “Look at what’s happening in the market – our shares are going up and theirs are tracking ours,” he told the Guardian. “It’s their job to explain to investors why they think they are the best management for the business. Their shareholders haven’t told us to go away.”
Melrose is expected to raise the stakes following GKN’s results on Tuesday. It is thought the buyout firm may have to sweeten its offer by raising GKN investors’ holding to about 65% of the merged group.
In a letter to shareholders this month, Mike Turner, GKN’s combative chairman who is a former chief executive of BAE Systems, criticised Melrose, saying: “[We believe] that Melrose is more focused on financial engineering than real engineering.” Last week, the defence secretary, Gavin Williamson, wrote to the business secretary, Greg Clark, who has the power to call a public interest inquiry into the deal, expressing his concern over Melrose’s bid.
The outcome of this battle is hugely important to the country. GKN can trace its roots back to 1759 with the founding of the Dowlais Iron Company, near Merthyr Tydfil, South Wales. Today, it is a global engineering company spanning more than 30 countries and with 58,000 employees, including 6,000 in the UK. They work on a range of automotive and aerospace projects, including the Porsche 918 Spyder, Boeing’s 787 Dreamliner and the Ariane 5 rocket.
At a time when another government is once again plotting an industrial strategy to help elevate Britain’s science and manufacturing base to compete with the best in the world, damaging a UK-based group such as GKN could put a large dent in those ambitions.
Labour leader Jeremy Corbyn last week said he wanted to broaden the public interest test in takeovers, and labelled Melrose an asset stripper. Melrose has denied the claim, saying it makes a large contribution to the UK economy. Last week Melrose unveiled a full-year loss of £27.6m, down from £69.3m, and raised its dividend by 91%.
Melrose’s approach to GKN, in early January, was timed perfectly as it caught its target at a low ebb. GKN had been left weakened by profit warnings in October and November, both sparked by problems at its aerospace division where it makes parts for the US F-35 fighter, the Typhoon jet and A400M military transport aircraft.
GKN’s vulnerability was exacerbated by management turmoil after the departure of chief executive designate Kevin Cummings following the second profit warning in November.
The chief executive role had only just been filled by 69-year-old Anne Stevens, a former chief operating officer at Ford, when Melrose made its move. Under a radical restructuring plan, Stevens said GKN will sell off its powder metallurgy division and hand back £2.5bn to shareholders. It will also split itself into aerospace and automotive divisions.
GKN insiders say splitting the businesses would make it easier for investors to value the auto arm, which it believes is grossly undervalued by the market.
However, the split could also pave the way for one or both divisions to be sold off to trade buyers. According to one well-placed investment banking source, GKN and US group Spirit Aerosystems have flirted with each other for years. This banker believes that in the event of a split it is far more likely that GKN will offload the aerospace business to Spirit. This would leave the remaining auto arm as an FTSE 100 standalone in its own right.
If Melrose wins, sources at GKN expect the turnaround firm to sell off the auto arm at a huge premium within a few years, followed by the aerospace division a few years later.
This plan could see Melrose’s top management cash in even larger amounts than they have previously earned. Last year, the top four executives at Melrose (the executive chairman, Christopher Miller; the executive vice-chairman, David Roper; the chief executive, Peckham, and the chief financial officer, Geoff Martin) received share-based bonuses worth about £36m each.
So investors are faced with a straight choice – the short-term sweeteners plus longer-term promise of a more focused business, offered by GKN; or the proven ability of Melrose’s management team to makea fast buck.
Melrose was co-founded in 2003 by Miller, a former Hanson executive; Roper, who had a background in corporate finance; and Peckham, a corporate lawyer. They listed Melrose that year on Aim as a £13m cash shell. Today, it is a FTSE 250 powerhouse with a £4.4bn market value.
The figures are undeniably impressive. However, Melrose has never taken on something as big, or as important to the country’s industrial base, as GKN.