GKN, the FTSE 100 aerospace and automotive company which issued a shock profit warning in November, has rejected an unsolicited £7bn approach from rival Melrose and unveiled plans to split in two.
A bid battle is now likely as Melrose, which specialises in buying struggling businesses, turning them round and selling them at a profit with the proceeds given back to shareholders, will pursue its interest despite GKN’s opposition.
GKN’s shares jumped by more than a quarter to an all-time high of 420p on the news, above the initial 405p cash and share offer on the table from turnaround specialist Melrose. But Melrose shares have subsequently climbed 7%, lifting the value of the offer to 422p a share.
Analysts at Jefferies said the company could be worth as much as 504p a share.
The proposed takeover was immediately criticised by Liberal Democrat leader Vince Cable, who said it was a serious threat to the government’s industrial strategy:
GKN said: “The proposal is entirely opportunistic and that the terms fundamentally undervalue the company and its prospects. In addition, the proposal would materially dilute the exposure of GKN shareholders to the meaningful upside opportunities that the board believes are present within the company.”
Melrose responded, saying: “Melrose believes that there would be significant operational and commercial benefits arising from Melrose’s ownership of GKN’s businesses, reversing a history of existing GKN management not delivering on margin targets .The potential acquisition represents a significant opportunity for Melrose to execute on its strategy of maximising inherent value of specialised industrial businesses it owns.”
GKN, which used to be known as Guest, Keen and Nettlefolds and traces its history back to 1759, has struggled in recent years and its profit warning came after a downturn in its US aerospace business. It expects to write down between £80m and £130m as the value of stocks at the division had been overestimated. The biggest factory, in St Louis in Missouri, makes air frames for F-15 and F/A-18 fighter jets.
Following the warning, its proposed chief executive Kevin Cummings was ousted from the business even before he took up the post and was replaced by non-executive director Anne Stevens on a temporary basis. Now Stevens, a former senior executive at Ford, has been handed the job permanently.
GKN said Stevens had conducted a review which would split its aerospace division – formed by the purchase of a stake in Westland helicopters in 1988 – from its automotive business.
It said both businesses would benefit from being separate companies with distinct investment profiles and capital allocation policies.
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: “The separation of the automotive and aerospace units has been on the cards for years, with little obvious crossover between the two businesses. Historically, the pension deficit has held the group together, but with the sprawling footprint likely to have contributed to recent profit warnings, the reasons for divorce now seem to outweigh the costs of splitting.
“The money to be made from a split is likely to have been what drew turnaround specialist Melrose to the table in the first place – the challenge for newly confirmed chief executive Anne Stevens is to deliver a better result for shareholders than the 405p she turned down today.”
GKN said current trading was in line with expectations, with 2017 profits expected to be slightly ahead of the 2016 figure of £678m before the US write-off.
Melrose has until 9 February to either make a firm bid or walk away. The company was founded and floated on the stock market in 2003 as a cash shell by three businessmen, Christopher Miller, David Roper and Simon Peckham, who put about £3m into the business. It is now valued at more than £4bn, having returned £4.4bn to shareholders since its formation.
Last May it emerged that the three founders, plus chief financial officer Geoff Martin, would share a bonus pot of £160m in one of the biggest corporate paydays in the City.
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