Could one of the oldest names in British industry be poised to break itself in two? It’s looking possible.
GKN, the car parts and aero-engineering group, is contemplating the radical move after rejecting a £7bn takeover approach from turnaround specialist Melrose that it has dismissed as “opportunistic”.
GKN is one of Britain’s most venerable engineers.
Its origins date back all the way to the start of the industrial revolution and it even supplied cannonballs to the Duke of Wellington’s army during the Napoleonic Wars.
Yet GKN is now not only venerable but vulnerable.
In October, it shocked investors with a profits warning related to problems in its aerospace division in the United States.
A month later, it announced that Kevin Cummings, who had previously run that division, would not after all be taking over as chief executive at the start of 2018 following a second warning related to those problems.
So the company, which has 58,000 employees worldwide, was exposed.
Enter Melrose. This is a company little known outside the City, where it has a devoted fan club, despite having been a FTSE-100 member in the recent past.
Melrose’s speciality is what it calls ‘buy, improve, sell’.
It buys unloved engineering companies that it believes contain assets that have been undervalued by the market.
It then invests in those businesses and spruces up their performance before selling them on.
In the process, it has delivered almost £3bn worth of returns in just over a decade to investors, which is why it is so popular in the Square Mile.
It claims it will be able to take GKN’s profit margins north of 10% – a move which, last year alone, would have added £300m to the bottom line.
GKN, with the benefit of hindsight, looked an obvious target for Melrose.
It has two large divisions with seemingly little in common, at least one of which – aerospace – has clearly been misfiring, and both of which are the kind of operations that Melrose has taken on and improved in the past.
Yet the proposed size of the deal here, £7bn, is of a magnitude beyond anything on which Melrose has previously embarked.
The response from GKN, chaired by Mike Turner – the Manchester United-supporting bruiser who was previously chief executive of BAE Systems – has been nothing short of dramatic.
Firstly, it has said that Anne Stevens, a US car industry veteran who was named interim chief executive in November, will take the job permanently.
Secondly, it will separate its aerospace division, whose customers include Boeing and Airbus, from its car parts division, whose customers include Volvo, Porsche and BMW.
This is something that GKN’s shareholders have long demanded but, previously, questions over the company’s pension scheme and possible tax liabilities have got in the way.
The company is not, as yet, contemplating a full-blown demerger but these moves certainly make that a possibility in future.
Thirdly, GKN has announced a transformation programme aimed at improving its operational performance, profit margins and cash generation, the latter of which it admits have fallen short of expectations.
The question now is how Melrose will respond, with market gossip suggesting it may now press ahead with a hostile takeover bid, a tactic it has deployed in the past.
GKN’s stock price suggests investors certainly expect Melrose to come back with a firm offer.
Shares of GKN, which closed on Thursday night at 332.7p and which were valued at 405p under the offer from Melrose, were trading at 420p on Friday morning.
The sum Melrose has offered for GKN, £7bn, compares with the latter’s market value of £5.7bn at the close of trading on Thursday night.
However, apart from contemplating a larger deal than it has tackled in the past, Melrose may face other potential obstacles in bidding that it has not previously encountered.
Liberal Democrat leader and former business secretary Sir Vince Cable has already urged the Government to intervene.
He said: “GKN is at the heart of the industrial strategy in the car and aerospace industry in the UK.
“If it were to be taken over, this would be a massive blow to our industrial strategy.
“GKN stands for long term investment in advanced manufacturing whereas Melrose are in the business of short term financial engineering.”
Melrose was named by its chairman and co-founder, ‘Jock’ Miller, after the town in the Scottish Borders close to the beat of the River Tweed he fishes.
If he goes hostile on GKN, though, Mr Miller and his colleagues will not be trying to land the salmon or sea trout for which the Tweed is famous, so much as trying to harpoon a whale.