GKN pledges £2.5bn return to shareholders to offset takeover
Engineering group GKN has fired a volley at Melrose over its approach to the company by claiming it will return up to £2.5bn to shareholders over the next three years.
The Redditch-based group said a significant chunk of the return was expected to come from divestments executed within the next 12 – 18 months, including the sale of its Powder Metallurgy division.
Melrose has currently set its bid for the group at £7.4bn and has urged GKN shareholders to accept the offer, which it said was in the best interests of the business.
The bid, if accepted, could see the GKN group split, with the separation of its successful automotive and aerospace divisions.
GKN’s blueprint for growth, which it has dubbed ‘Project Boost’, involves tapping into its successful operations to improve financial performance.
The company said the plan would:
o Deliver distinct strategies for different product segments with rigorous capital allocation and focused performance targets
o Establish a delivery culture based on greater accountability, capability and pace, supported by aligned incentives
o Separate the Aerospace and Driveline divisions to maximise shareholder value
The GKN board has said it expects Project Boost to deliver a recurring annual cash benefit of £340m from the end of 2020.
In addition, it said its progressive dividend policy would be to target an average payout of 50% of free cash flow over the period of 2018-2020.
It expects to distribute surplus cash to shareholders, subject to maintaining an investment grade credit rating.
Anne Stevens, Chief Executive of GKN, said: “The new strategy brings clarity, accountability and focus to GKN’s world class businesses and will allow the group to attain world class financial performance.
“This strategy is expected to generate significant cash for shareholders in the short term and meaningful sustainable cash flows over the mid to long term.
“We expect to deliver £340m of recurring annual cash benefit from the end of 2020 and are targeting a return of up to £2.5bn to our shareholders over the next three years, with a significant part expected to come from divestments executed within the first 12 -18 months. We have a plan and we are dedicated to delivering it.”
In a letter to shareholders, GKN chairman Mike Turner said: “The board continues to view the offer as entirely opportunistic and believes that its terms fundamentally undervalue GKN and its prospects.
“The Melrose offer is not a good deal – it is low price and high risk. GKN has world class businesses with huge potential that is just beginning to be realised.”
He urged shareholders to take no action on the Melrose approach.
In response, Melrose said the announcement was a stark admission of GKN’s underperformance over many years and a validation of the Melrose diagnosis.
It said hidden away in the plan was an acknowledgement that GKN’s group trading profit margin for 2017 of 7.4% was below consensus forecast.
It added that the fundamental transformation in culture and approach required to improve the group was only possible with a change of control, new leadership and fresh thinking.
Under the Melrose offer, GKN shareholders will receive an immediate £1.4bn in cash and further cash payments in the medium term once the Powder Metallurgy business has been improved and sold and as the full value of Nortek is realised.
“Melrose’s offer has already added approximately £1.2bn of value to GKN shareholders. Without our offer the GKN share price would likely be considerably lower than it is today,” it said.
