In the old days of blood-and-thunder hostile bids, the unveiling of the offer document was a big moment. The bidder would formally throw its cards on the tables, hurl a few choice insults at the target’s management and generally enliven proceedings. Melrose’s £7bn offer for GKN is proving to be lower in energy. That is not just because takeover rules impose greater calm these days. It is also because Melrose’s formal document on Thursday lacked a certain pizzazz.
Everybody knows by now that Melrose’s managers have been stunningly successful in enriching their shareholders (and themselves) in past deals. A pound invested at float in 2003 is now worth £17.70. But the main doubt about the approach to GKN is whether the formula can be repeated on a bigger business with hard-nosed customers like Airbus, Boeing and the big carmakers.
On that score, Christopher Miller’s letter offered more style than enlightenment. The Melrose chairman seemed more concerned with puncturing the perception that his outfit is a ugly asset-stripper that would happily dismember GKN before breakfast. Don’t worry, we get it: Melrose is a UK-quoted company that invests in its operations and, if GKN’s aerospace and automotive divisions are eventually separated, one or other could have its own listing on the London market.
But what’s the big plan to shift GKN through the gears? None of the ideas sound terribly complicated. Restructuring the head office may save a few quid. Clearing out of a few layers of management to create “a speedy, flat and non-bureaucratic organisation” is plainly sensible. So is a focus on profits, rather than sales. So is investment that concentrates on returns.
Melrose might respond that a dose of common sense is all that’s required. But the approach does leave the door open for GKN to promise to perform a few of the same tricks, in which case its shareholders would enjoy 100% of the benefits rather than sharing them.
GKN’s new chief executive, Anne Stevens, still has to prove her credibility and produce a decent strategy, of course. If she can’t, Melrose will romp home.
But as things stand, the offer, which is mostly in Melrose’s own paper, represents a premium of 28% to GKN’s share price before the action started. That’s decent, but it’s not a knockout price for a business that is far from being a basket case. To deserve support, Melrose must offer to share more of the spoils.
Unilever buoyant since killing Kraft bid
On the generally reliable principle that managements only announce targets they think can be achieved, it is no surprise that Unilever is “well on track,” as its chief executive, Paul Polman, put it, to meeting the goals it set after dispatching Kraft Heinz’s approach a year ago.
A 20% profit margin by 2020? It’s the way to bet. Unilever is not yet motoring at full speed, and market conditions are far from perfect, but margins improved to 16.5% in 2017 from 14.8% in 2016. Profit before tax climbed 9% to €8.1bn (£7.1bn), or by 13% ignoring currency movements.
The next excitement concerns the announcement of the location of Unilever’s single headquarters. That’s a UK-versus-Netherlands affair with political undercurrents, and the UK does not start as favourite. Expect to hear much muttering about how the site of an HQ is less important for a multinational these days. Well, maybe.
But we definitely should give thanks that long-termist Unilever banished Kraft, an unlovely and brutal cost-cutter, over the course of a weekend. Shareholders should be grateful too: Unilever’s shares are up 25% since the fun and Kraft’s have fallen 11%, perhaps demonstrating that the bidder needed the deal more than it cared to admit.
The only quibble is why it required an approach for Unilever to pull rabbits from its hat. As fund manager Terry Smith put it the other day: “We think we should already have seen the rabbits or at least been told about their existence.”
Capita faces tricky questions
Another day, another 13% off Capita’s share price. That’s 54% since Wednesday’s profits warning and axed dividend.
There is still no need for government ministers to panic since Capita has arrangements in place for a £700m fundraising from shareholders, underwritten by Citi and Goldman Sachs. That makes its financial distress different from Carillion’s. The construction firm’s numbers were far worse and it was scrambling for bank loans, as opposed to permanent equity.
But Capita’s chief executive, Jonathan Lewis, still needs to get his skates on. Investors and City analysts have recovered from their shock and are asking tricky questions. How severe is Capita’s underinvestment in IT and software? How much needs to be spent to fix the problem? Is £700m enough to do the job, repair the balance sheet and boost payments to the pension fund? How much does the disposal programme need to raise?
The sooner the rights issue happens, the better.