The board of FTSE engineering business GKN unanimously rejected a revised offer from Melrose on Monday arguing it fundamentally undervalues the company.
Earlier that morning, Melrose said it would be offering 467p a share valuing the business at £8.1bn. It argued it had decades of experience transforming businesses and would “re-energise and re-focus” GKN.
GKN shares soared in January after it thwarted a £7bn takeover bid from Melrose.
Jupiter UK Growth manager Steve Davies (pictured) yesterday became the first shareholder to reject the bid while Aviva Investors chief investment officer David Cummings came out in favour of the takeover shortly after.
Davies holds 4.3% in GKN, one of the largest allocations from any retail Oeic or unit trust, and around 1% in Melrose. Aviva Investors holds more than 5% in Melrose and a much smaller amount in GKN.
The RLAM UK Opportunities fund, managed by Craig Yeaman, is the retail fund with the largest allocation to GKN holding at 5.2%. A spokesperson said they would not be commenting on the bid.
Meanwhile, the F&C UK Mid Cap fund has the largest allocation to Melrose, also with 5.2%.
In February, GKN promised to return £2.5bn in cash to shareholders over the next three years to defend itself against an earlier £7bn hostile takeover from Melrose Industries.
GKN chairman Mike Turner said to shareholders on Monday: “Over the past few weeks, we have demonstrated how much we can achieve for our shareholders… Give us the opportunity to finish the job. Reject Melrose’s offer.”
A significant portion of the £2.5bn cash return is expected to come from parts of the business it intends to shed over the next 12 to 18 months, including the sale of its powder metallurgy business.
Highest allocation to GKN among retail open-ended funds
| Royal London – UK Opportunities | 5.2 |
| S&W – Revera UK Dynamic | 4.3 |
| Jupiter – UK Growth | 4.3 |
| Virgin – Climate Change | 3.4 |
| LF Canlife – UK Equity Income | 2.8 |
Source: FE
Pension and balance sheet risks
Turner said Melrose is “not the right owner of GKN”.
“Its management lacks relevant experience and its short term business model is inappropriate for GKN’s customers and its investors. Winning new business in our markets would be more difficult if customers were uncertain as to the identity of their future long term partners.”
Davies praised the new GKN management for addressing a number of areas his team had flagged to them in 2017.
He said the sale of Driveline to Dana offers “by far the best way forward”, along with the other disposals, and would leave a “high-quality, pension-free Aerospace division with good long-term prospects and a strong balance sheet”.
He added: “I can see how the measures announced to date could deliver a substantial uplift in value over the next couple of years. I don’t see the need to dilute this value creation by accepting the Melrose proposal, which also brings with it pension risk, balance sheet concerns and potential issues with how GKN’s customers might react to the change of ownership.”
However, Melrose chairman Christopher Miller said the company invests “as if we were to own the business forever”.
“We are certain that GKN’s new strategy of hasty short term business break up will not benefit the long term requirements of customers. In the aerospace segment we note that GKN has received approaches for that division, while at the same time contemplating a flawed sale of its auto division to a US buyer,” Miller said.
Highest allocation to Melrose among retail open-ended funds
| F&C – UK Mid Cap | 5.2 |
| Smith & Williamson – UK Equity Growth | 3.9 |
| Rathbone – UK Opportunities | 3.6 |
| Royal London – UK Opportunities | 3.1 |
| Royal London – UK Mid-Cap Growth | 3.0 |
Source: FE
Airbus
Airbus told the Financial Times on Wednesday it would be “practically impossible” to give new business to GKN if it was taken over by Melrose. The comments were due to concerns over a lack of clarity from Melrose over its long-term strategy for GKN, plus its track record on research and development.
Davies said “this is definitely something that investors need to factor into their thinking”.
He added it was an issue that could crop up with the Driveline business where the big auto original equipment manufacturer (OEMs) may have similar concerns.
However, Miller said it has spent approximately 4% of sales, fully expensed, over the last five years, at its businesses Elster and Nortek, which is “nearly double the level that GKN has seen over the period 2014 to 2016”.
