The war of words is almost over as GKN shareholders have until Thursday lunchtime to decide if they back GKN’s board or a new future under Melrose. But just what is at stake?
:: What is GKN?
GKN is the third-largest engineering company in the FTSE 100 after BAE Systems and Rolls-Royce. It is also one of the UK’s oldest, dating back to 1759 and the dawn of the Industrial Revolution.
It employs 59,800 people worldwide, including 6,000 in the UK. Its two main divisions are GKN Aerospace, which makes components for most of the world’s biggest aircraft makers, including Airbus and Boeing and GKN Driveline, which makes and designs drivelines for most of the world’s biggest carmakers, including Volkswagen, Ford and Jaguar Land Rover.
A third division, GKN Powder Metallurgy, makes materials and composites used in applications such as 3D printing.
Image: GKN’s board fiercely opposes the Melrose takeover
:: What is Melrose?
Melrose specialises in the turnaround of good but under-performing companies.
:: Govt seeks assurances from Melrose on GKN
Founded in 2003 by three former executives of Wassall – an industrial conglomerate whose activities ranged from making glue to bottle tops – and its stock market valuation has since grown from £13m to £4.4bn.
Its corporate slogan is ‘Buy, Improve, Sell’ and it has done four major acquisitions in its corporate lifetime, generating a total shareholder return of 3,000% since its flotation – compared with 171% at GKN.
Its main operating divisions at present are Brush, a generator maker and Nortek, a heating and security systems maker.
:: Why has Melrose launched a bid for GKN?
Melrose believes that GKN has under-performed for a number of years, missing profit targets and misdirecting investment.
It blames poor management and corporate culture, slow decision-making and a focus on growing sales, rather than profits, for this – and argues it could run GKN’s various businesses better.
Image: GKN built Spitfires as part of its contribution to the war effort in the Second World War
:: Why has GKN become a target?
GKN became a sitting duck when, in October last year, its share price collapsed after a shock profits warning related to problems in its aerospace division.
A month later it announced that Kevin Cummings, who had been running that division, would not be taking over as chief executive. This left it effectively leaderless – until Anne Stevens, a non-executive director, became interim CEO.
This appointment became permanent when Melrose launched its bid. Melrose does not embark on takeovers lightly: in 2011, it spent months lining up a £1.6bn bid for the engineering group Charter, only to walk away when Charter’s management refused to negotiate with it.
:: Why should I care about this bid?
Because GKN is one of the UK’s premier manufacturers. Its high-skill, high-value added activities are just the kind of activities the UK economy needs. And, as a FTSE-100 constituent, almost anyone with a pension, life policy or stocks and shares ISA will indirectly own a stake in this business. GKN’s pension scheme also has 34,000 members, half of whom are already drawing a pension.
:: Why has the Melrose bid come in for criticism?
Some MPs – led by Sir Vince Cable, the Liberal Democrat leader, and Jack Dromey, Labour’s shadow work and pensions minister – and the trades unions accuse Melrose of being short-termist asset strippers who would take an axe to jobs at GKN.
GKN itself argues Melrose spends less on research and development, as a percentage of sales, than it does. It also argues that it is a more complex business than any of those previously bought by Melrose in the past – adding that Brush, one of the businesses Melrose has bought in the past but not sold, has probably been its most complex acquisition to date.
:: Is that criticism justified?
Melrose has made no secret of planning to take out management jobs should it succeed in its bid.
But former executives of businesses it has bought in the past have argued that Melrose has not underspent on research and development and, in some cases, has created jobs. The former boss of McKechnie Plastic Components, a business previously owned by Melrose, told the Financial Times that Melrose was the best of the four different owners he had worked for.
:: What is the alternative future mapped out by GKN?
GKN has said it will sell its Powder Metallurgy business and return the proceeds to shareholders. It has also said it will sell its Driveline division to Dana, a US company, with GKN shareholders receiving a mixture of cash and shares in the enlarged Dana in return. It would leave GKN as a pure aerospace business.
Image: The Unite union is among those opposing the Melrose bid
Melrose argues that, as Dana does not have a primary UK stock market listing, not all GKN shareholders would be able to keep their shares in the enlarged Dana.
:: What about the pension scheme?
The pension scheme currently has an estimated deficit of £1.1bn.
GKN has said that, should it win the day, it will inject £235m into the scheme, along with £390m from sale proceeds, while Dana would inject some £124m.
Melrose, whose main pension scheme is in surplus, reached an agreement with the GKN trustees last week in which it promised to inject £1.1bn into the GKN scheme should its bid succeed.
Melrose argues that, under GKN’s break-up proposals, the stand-alone aerospace business would be “overburdened” with a disproportionately high level of pension liabilities.
:: Can the Government block a takeover?
Not really. Under the Enterprise Act, ministers can only block a takeover on grounds of media plurality, financial stability or national security issues, none of which come into play here.
Image: Greg Clark faced criticism for making demands of Melrose only this week
Greg Clark, the Business Secretary, has, however, received a number of commitments from Melrose, including promises to maintain a UK head office and stock market listing, continuing to pay UK taxes and pledges on spending on research and development and apprenticeships.
:: When do we know the result of the shareholder vote?
Melrose’s offer closes at 1pm.
To win, it needs to have acceptances from 50.1% of GKN’s shareholder register by then. As soon as it has achieved that, it can go public with that news at any time. If it fails, it will make this clear by 1pm on Thursday.
:: Who’s backing who?
GKN’s management has been supported by Colombia Threadneedle, which owns 3.5% of GKN shares, along with Pelham Capital, Sanderson Asset Management, Jupiter Asset Management and Lancaster, which own another 5%.
Melrose is supported by Elliott Advisors, which owns 3.8% of GKN and Aviva Investors, which owns 1.2%. The decisions of Blackrock, which owns almost 7% of GKN and Standard Life, which owns 5.5%, could therefore be critical.
Around 25% of GKN shares are owned by hedge funds – the majority of whom are expected to support Melrose.
The financial press is also divided. GKN’s management is supported by The Guardian and the Daily Mail while The Times, the Financial Times and The Daily Telegraph have gone with Melrose.
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:: What are the main arguments?
Melrose argues it has a superb track record in turning around poorly performing businesses. GKN argues it is of a size and complexity that Melrose’s management has never tackled before. GKN argues that its plans for independence will deliver clarity and focus to its business. Melrose argues GKN’s deal with Dana is giving away GKN Driveline at a £900m discount to GKN’s own previous valuation of the business.