GKN offers stout defence as Melrose continues to circle

By Simon Warburton | 15 February 2018

GKN is putting up a strong fight as interest from Melrose shows no sign of disappearing

GKN is putting up a strong fight as interest from Melrose shows no sign of disappearing

GKN's bitter war of words with manufacturing investor, Melrose shows no sign of abating with both sides trading barbs today (15 February) in a bid to woo shareholders.

Melrose insists its takeover offer for GKN rates shares at £4.10, a premium of 26%, with GBP1.5bn (US$2.1bn) of value being added to the British supplier; a move derided as "entirely opportunistic" by the UK automotive and aerospace parts manufacturer.

However, the British supplier had maintained Melrose's offer valued GKN shares at £3.97, with the approach, "low price" and high risk.

"As you know, on 1st February, Melrose made an offer for GKN which, on the basis of its latest share price, values [GKN] at only 397p per share and leaves you with 57% of an enlarged Melrose," said GKN chairman, Mike Turner. "This offer is entirely opportunistic and the terms fundamentally undervalue GKN.

"Under our new plan...we are targeting a 2020 management trading margin of 11% for the core GKN Group, at least 14% for core Aerospace and at least 9.5% for core Driveline.

"The new strategy has a clear framework that is expected to result in significant cash returns to GKN shareholders. We plan to sell our Powder Metallurgy division as well as a number of other non-core businesses.

"In total, we are targeting returning up to GBP2.5bn to shareholders over the next three years, with a significant part expected to come from divestments executed within the first 12-18 months.

"The strategy also includes separating our Aerospace and Driveline businesses to ensure greater transparency and focus. Today, we are separating operationally. We will separate formally when it maximises value."

Melrose has responded sharply to GKN's robust defence of its position however, with chairman, Christopher Miller maintaining it was "another attempt" to distract from the real issue. "Quite simply, can a GKN board with a self-confessed record of underperformance be trusted to reinvent itself into an agent of fundamental cultural change?" he said.

"We firmly believe the GKN team cannot. Melrose has demonstrated it builds businesses to long term health. We invest almost double in percentage terms in expensed R&D than GKN does by itself. In addition, on average we spend fully a third of our original equity purchase price on capital expenditure and business improvement.

"We will not cut corners in making the necessary investment we believe GKN's businesses need. Nor will we indulge in a hasty fire-sale of the businesses the GKN board has identified as non-core. We are a quoted British company which finances itself on investment grade terms. We are an impeccable custodian of pensions.

"We recognise the importance of all GKN stakeholders. We believe shareholders will view today's document as a sideshow and focus instead on the main issues of value creation and responsible ownership, in which Melrose excels."

The GKN chairman also chose to highlight what he said was the "limited experience" of Melrose in the aerospace and automotive sectors, having exited both more than six years ago.

"As a result, there is no evidence Melrose's management has relationships with key customers such as Airbus, Boeing, Fiat Chrysler, Ford and VW," added Turner. "Furthermore, Melrose's stated three-to-five-year exit strategy is not compatible with the long-term investment and technology horizons essential in GKN's markets.

"Cars and aircraft are researched, designed, produced and serviced over several decades - your board believes a short term, private equity-style strategy is not the right way to provide sustained shareholder value in our sectors."