It is easy to understand why Aviva Investors has sided with Melrose in the great £8bn bid battle for GKN. The fund management house has a 5.4% stake in Melrose and a holding of only 1.2% in GKN. David Cumming, the Aviva chief investment officer, may genuinely believe that Melrose’s “measured execution of value” is best for shareholders in both companies, but it’s not a high-risk gamble from his point of view. If Melrose were to grab control of GKN on the cheap, that’s great news for his funds.
Aviva won’t be alone in having positions in both companies, which makes the outcome of this takeover scrap hard to predict. For some investors, it’s all about which management team, and which break-up plan, to prefer. For those that own only GKN shares, notions like fundamental value also matter.
On that old-fashioned yardstick, Melrose’s offer is too low. The bidder, with its shares down 5% on Monday after modestly improving its terms, is offering GKN shareholders only 442p, mostly in the form of its own paper. That may look impressive against a GKN share price that was trading at 326p before the fun started, but January’s price ignores the various fireworks subsequently launched from GKN’s embattled boardroom.
GKN rejects Melrose’s new hostile £8bn bid
The pyrotechnics show hasn’t gone off perfectly, it should be said. GKN’s promise to demerge was the correct defence but Dana of the US is only a semi-convincing partner for Driveline, the automotive division. GKN shareholders are being asked to take a 47% stake in a US-listed company with a less than illustrious corporate history. Owning US-listed paper will be a problem for some UK funds.
Yet even an imperfect $6bn (£4.8bn) automotive deal has underpinned the value in one half of GKN. It also solved GKN’s wider pensions problem, whereas Melrose is still scratching around without agreement with the trustees. The Dana proposal also gives GKN shareholders a clearer picture of what they would own directly and reasonably soon – a pure aerospace company that, despite recent self-inflicted calamities in the US, has high-quality assets and a long order book.
It still requires a few generous assumptions to value GKN at 500p, as management does, but some City analysts share the assessment. Either way, one can be confident that shares in an independent GKN would not fall to their pre-bid level. A price around 400p might be nearer the mark. If so, Melrose’s final offer at 442p – giving GKN’s shareholders a 60% share of the pie, versus 57% previously – just looks plain mean. Hostile bids are meant to mean decent takeover premiums. The one on offer here is miserable.
GKN should never have found itself in a position of extreme vulnerability, of course. The board, led since 2012 by the chairman, Mike Turner, has not served shareholders well. But, barring an unlikely 11th hour political intervention, it’s a choice between the GKN’s break-up plan and Melrose’s offer.
The latter’s break-up plan would take longer to execute; it probably carries as many executive risks because Melrose’s crew, even if they’re well regarded by investors, haven’t played in this league before; and there would be more debt around.
The gamble might be attractive to GKN if the takeover terms were decent. But they’re not. Melrose’s offer may succeed – but it doesn’t deserve to.
Why hasn’t Aim hailed Chi-Med success?
Two companies on London’s junior stock market, the Alternative Investment Market, claim about 90% of the attention. That’s understandable since fashion retailer Asos, the biggest, and tonic water upstart Fever-Tree, the third biggest, are well-known firms that have been superb investments.
What’s the second biggest? It’s Hutchison China MediTech, or Chi-Med, which has performed just as well. The firm first was mentioned in this column as long ago as 2009 when share price was 200p. Now the shares are £51.40, giving a stock market value of £3.45bn.
Chi-Med is the first serious attempt to build a Chinese-based international pharmaceutical firm and the project is plainly going well. Monday’s full-year numbers continued the smooth progress. Fruquintinib, a colorectal cancer treatment being developed with US pharma giant Lilly, could be launched in China later this year. Savolitinib, for lung cancer, is partnered with AstraZeneca and being tested in combination with some of the UK’s firm’s established drugs.
Nothing is guaranteed in the drug-development game but Chi-Med’s soaring valuation points to investor interest, especially in the US, where the firm now has joint listing on Nasdaq. The Aim market has its critics, but the criticism in this case is that London has not done enough to shout about a big success. If there were more Chi-Meds, nobody would care about titans such as Saudi Aramco.