Melrose fans the flames on incendiary bid for GKN

Warwickshire manufacturing turnaround specialist Melrose has stoked the fires of controversy by affirming its view that it can add value to engineering giant GKN.

Redditch-based GKN surprised the markets on Friday with an announcement that it had received an audacious bid from Alcester-based Melrose, which valued its business at around £7bn.

GKN has shunned the approach and in a statement issued without Melrose’s consent said the offer significantly undervalued the company.

The approach had an instant impact on GKN’s share price, which rose by 27% in early trading.

In its own statement on Friday, Melrose confirmed it had made the approach, which was to acquire the entire issued and to be issued share capital of GKN. The bold move resulted in an immediate hike in Melrose’s own shares – although this fell back in later trading.

Melrose had submitted an offer based on a payment of 405p for each GKN share, with 80% of this coming in the form of new Melrose shares and the remaining 20% in cash.

It said this represented 1.49 new Melrose shares and 81p in cash for each GKN share and would result in GKN shareholders owning approximately 57% of the enlarged group. The terms represent a premium of approximately 24% over the closing share price of GKN on January 5, 2018, the last business day prior to the approach.

The cash element of the bid was to have been funded by a new debt facility.

Today, Melrose said it would be commencing a series of shareholder meetings to discuss its acquisition proposal and affirm why it is an appropriate suitor for the business.

In a presentation to the meetings, Melrose describes GKN’s current position as “an overly complex and under-managed organisation without focus” and one which needs “a fundamental change of culture and leadership”.

Melrose said GKN had underperformed the FTSE350 total shareholder return (TSR) by approximately 26% since the flotation of Melrose in October 2003 and was now ranked 227th amongst the existing index constituents.

By contrast, Melrose said it was the third best performing FTSE350 company in terms of TSR for the same period and had outperformed GKN’s TSR by approximately 18 times.

It said £1 invested in a Melrose share since flotation would be worth £17.70 today.

The presentation goes on to say GKN has a history of missed margin targets since 2011 and if GKN was to achieve the top-end of its stated divisional target trading margins in 2017 then the group’s trading profit for the period would be approximately £300m higher than consensus.

GKN’s consensus group trading margin for the full-year 2017 is 7.7% which Melrose said, is the same as the full-year 2011.
“The lost opportunity is despite GKN having spent approximately £3.2bn on capex and acquisitions between 2012 and 2016,” Melrose said.

“Melrose has stated that it expects to re-energise and re-purpose GKN’s operations to enable them to exceed GKN’s own top-end group trading margin target of 10%. Melrose intends to significantly improve GKN’s businesses as opposed to a hasty break up.”

Melrose had said on Friday that it believed there would be significant operational and commercial benefits arising from its ownership of GKN’s businesses.

In its own statement on Friday, GKN had confirmed its intention to separate its aerospace and automotive divisions.

 

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