GKN rejects Melrose offer, appoints new CEO and announces restructure
Shares in GKN surged on Friday after the company said it has rejected a bid proposal from Melrose and appointed Anne Stevens as chief executive, as it announced plans to separate its aerospace and automotive businesses.
GKN confirmed that it received a bid from Melrose on Monday at 405p per share, comprising 80% in new Melrose shares and 20% in cash. The offer price represents a premium of around 24% over GKN's closing share price on 5 January.
Having considered the proposal with its financial advisers, the group has unanimously rejected it, saying it is "entirely opportunistic and that the terms fundamentally undervalue the company and its prospects".
"In addition, the proposal would materially dilute the exposure of GKN shareholders to the meaningful upside opportunities that the board believes are present within the company."
Melrose said there would be "significant operational and commercial benefits arising from Melrose's ownership of GKN's businesses, reversing a history of existing GKN management not delivering on margin targets".
In particular, the group said 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%".
GKN, which issued a profit warning in October, also announced the appointment of Anne Stevens, currently interim CEO, as its new chief executive with immediate effect.
Chairman Mike Turner said: "The board believes that Anne Stevens has the track record to transform GKN.
"Her operational and strategic skills are ideally suited to GKN and the board is very impressed with the contribution she has made so far in setting out plans for a significant improvement in the group’s performance."
In November last year, GKN announced that it had parted ways with Kevin Cummings just two months after saying he would step up to be chief executive, as it warned of further issues at its aerospace business. Cummings was meant to take over from Nigel Stein when he retired at the end of December.
The company also said on Friday that having undertaken an intensive analysis of the economic benefits and costs of separating the aerospace and automotive businesses, it had decided to go ahead with it.
"The board intends to separate the businesses, recognising the strategic optionality for shareholders in having separate companies with distinct investment profiles and capital allocation policies. The board will communicate further details on the optimal method of separation in due course. The timing of the separation will be determined by the need to maximise the economic benefits and minimise the costs associated with separation."
In its statement, Melrose said shareholder value would be maximised by GKN significantly improving the businesses before separating them. "The potential acquisition represents a significant opportunity for Melrose to execute on its strategy of maximising inherent value of specialised industrial businesses it owns," it said.
GKN also updated investors on its transformation programme. It began a wide-ranging review in 2017 and said a new strategy has now been developed to significantly improve performance in all of its businesses.
The group is now creating differentiated product segments that will be classified as either core or non-core. There will be three different strategies for the core product segments - improve (e.g. constant velocity joints), grow (e.g. aero engines) and develop (e.g. edrive and additive manufacturing).
Each strategy will have different capital expenditure targets and different expectations for growth, margin improvement, cash generation and return on investment. However, all will have stretching targets to be achieved through a transformation programme.
"Project Boost" is a two-year programme to improve cash and profit that will incorporate all areas of the business operating system including culture. This includes optimising direct and indirect procurement, process and productivity, and capital allocation.
GKN's statement on Friday packed a lot in, with the company also providing an update on fourth quarter trading, which it said was in line with expectations. It continues to expect 2017 pre-tax profit to be slightly ahead of 2016's £678m before the additional working capital write-off in North American Aerospace announced in November.
It said the balance sheet review in North America has progressed significantly and the one-time write-off and associated costs are still estimated to be between £80m and £130m, albeit nearer the upper end of that range.
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: "GKN has made up for years of lumbering progress in a flash. A takeover offer, subsequent rejection, new CEO, transformation strategy, trading update and planned separation of the business all in one go - it’s hard to describe GKN as a Mondeo now!
"The separation of the automotive and aerospace units has been on the cards for years, with little obvious cross over between the two businesses. Historically, the pension deficit has held the group together, but with the sprawling footprint likely to have contributed to recent profit warnings, the reasons for divorce now seem to outweigh the costs of splitting.
"The money to be made from a split is likely to have been what drew turnaround specialist Melrose to the table in the first place - the challenge for newly confirmed CEO Anne Stevens is to deliver a better result for shareholders than the 405p she turned down today."
Ian Forrest, investment research analyst at The Share Centre, said: "All of this news is clearly good for GKN shareholders and represents a very bold move by Melrose. It may come back with an improved offer, they have until 9th February to make a formal bid, and there is the possibility of other bidders coming in."
Olivetree Financial said the separation of the aerospace and automotive divisions brings material value to GKN shareholders even without any consideration of Melrose’s possible offer. It said it could envisage the stock trading at 370p to 380p easily on Friday even if it GKN had just announced the break-up plan.
"Looking back at similar plans announced across comparable firms gives us a good insight into how the market treats companies with plans like this in place. Continental is currently reviewing its structure and legal set-up, and is expected to update the market in the next few months on this plan, its shares appreciated by around 10% as the market learned of the detail. Autoliv saw a similar performance when it announced a plan to split in two in September, as did Delphi."
Olivetree said that although Melrose - which operates a "buy, improve and sell" model - is a disciplined buyer, it would seem unlikely that it didn't expect to be rejected and therefore has no room for improvement.
"So the argument seems that the current share price of GKN is asking buyers to pay little for the M&A side of things, and yet Melrose are likely to have at least one more iteration ahead. With notable shareholder overlap between the two registers, it is likely that UK industrials shareholders will broadly approve of the concept of Melrose acquiring GKN. The latter has suffered weak performance in recent times, and its management team has seen much upheaval. Accepting any Melrose offer will always see these shareholders going on as materially sized holders of any NewCo, so the benefits of a transfer of ownership should be clear.
"GKN becomes run by a very competent management team who are hugely focused on shareholder returns, and very likely to dispose of various assets under the GKN umbrella. So not only can these shareholders enjoy the financial benefits of a break up, but potentially start to put M&A multiples on some parts of the business - a materially more attractive proposition than OldCo GKN offered."
At 1140 GMT, GKN shares were up 27% to 422.50p, while Melrose was up 5% to 225.90p.