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Melrose GKN spinoff: MRO demerger of auto parts business details and timing

By David Burrows

09:26, 8 September 2022

GKN logo on hybrid car. Photo: Shutterstock
Melrose took over GKN via a hostile bid in 2018. Photo:Shutterstock

Melrose Industries (MRON.Lplans to spin off its GKN automotive unit as a new UK-listed company, just four years after it acquired the engineering group in an $11bn  a hostile takeover.

GKN plans to trade on the London Stock Exchange next year under a name yet to be decided.

The plan does not include GKN’s aerospace arm. Melrose will remain owner of GKN Aerospace, a supplier of aerostructures and engine systems for companies including Airbus (AIRfrand Rolls-Royce (RR.).

This morning, in its interim results Melrose confirmed its intention to separate GKN's automotive and smaller powder metallurgy businesses from its aerospace arm through a demerger of shares.

It went on to say that Liam Butterworth, current chief executive of GKN Automotive, would head the demerged business with finance director Roberto Fioroni taking up an equivalent role at Demerger.co. The company is expected to appoint a chair at a future date.

Melrose intends to seek shareholder approval for the proposed demerger in the first half of 2023.

GKN demerger a good move?

Does the demerger come as a surprise? Not according to Danni Hewson, financial analyst at AJ Bell.

“Melrose’s decision to spin off GKN’s automotive unit is about as unexpected as rain in the UK. Melrose has a track record for taking on ailing businesses, giving them an injection of oomph and then selling them off, often in pieces.”

Hewson adds that while purists and history nuts might bemoan this move, in truth it looks like the right one.

“Both parts of the business can now focus on their singular unique selling points and are likely to be able raise extra cash to help them on their journeys. And the automotive sector is ripe for growth and investors will note the huge opportunities GKN is already seizing in the electric sphere. Shucking off the past will help the new business fully embrace the future.”

Jason Hollands, managing director at Best Invest also sees the logic behind the demerger.

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“Melrose has a clearly stated strategy of “buy, improve and sell” and the de-merger will enable it to continue to do that in broader industries including its presence in aerospace, while creating a standalone business that can focus specifically on opportunities in the auto sector.”

He added: “The latter is clearly undergoing a lot of change due to the shift towards electric vehicles and where there appears to be mispricing given the valuation of Tesla versus other players. A spun off auto group has the potential to become a major consolidator in the sector, so it is quite an interesting development.”

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Commenting on the demerger, Justin Dowley, Chairman of Melrose Industries said:

“Since acquiring GKN in 2018 we have reinvigorated each business to achieve its potential. The proposed Demerger now gives each an exciting opportunity to individually grow shareholder value through organic growth and acquisition in both platforms.

Meanwhile, we remain on track to meet our full year 2022 expectations with full inflation recovery and providing good momentum for the intended Demerger in the new year.”

In its interim results, Melrose reported revenue up for 2022 compared to 2021 but net debt levels also up. Adjusted pre-tax profits were also up to £128m from £114m in 2021 but operating profit was down to £171m from £196m.

Specifically, regarding GKN Automotive, the report said it: “Successfully managed volatile demand caused by industry supply chain issues and revenue was broadly flat. Life of programme business wins of c.£2.6bn were achieved, with a record 55% proportion on electric and full hybrid vehicles.”

Melrose insisted its “Buy, Improve, Sell” strategy would continue unchanged and the Board expects to pursue future acquisitions as soon as possible post demerger. “These could either be in aerospace or the wider industrial sector, as appropriate,” the statement said.

Shares in Melrose rose sharply in early morning trading – hitting just over 145p at one point before falling back to 135p level.  

Markets in this article

AIRfr
Airbus
132.75 USD
1.08 +0.820%
MRO.L
Melrose Industries PLC
5.6415 USD
0.07 +1.290%
RR.
Rolls-royce
4.445 USD
0.015 +0.340%

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