Manufacturing turnaround specialist Melrose plans to meet GKN shareholders to convince them of the benefits of its £7bn takeover offer, rejected by GKN management last week.
The UK-based engineering firm rejected Melrose’s offer as “entirely opportunistic” and set out plans to split its business in two.
However, Melrose’s pursuit of GKN is dogged and it is now spelling out what it believes are strong arguments to ‘unlock the potential’ within GKN.
Melrose describes GKN’s current position as an “overly complex and under-managed organisation without focus which needs a fundamental change of culture and leadership.” It also points out that GKN has a history of missed margin targets going back to 2011.
Repurpose the business
Melrose insists it can ‘re-energise and re-purpose ‘GKN's operations to enable them to exceed GKN's own top-end group trading margin target of 10%. “Melrose intends to significantly improve GKN's businesses as opposed to a hasty break up,” the company argues in its latest investor presentation.
Simon Peckham, Chief Executive of Melrose, spelled out to GKN shareholders what he saw as the prime options.
“They can elect to sell in the market right now for a substantial premium to Friday's opening price - which itself has increased following a rise in the price of Melrose's shares. Or they can choose to combine their business with ours and have the majority share in what we are confident will be a business capable of significant value enhancement!”
He added: “This is in stark contrast to a break-up of the business by a GKN management team which has consistently underperformed or a hasty possible sale of parts or all of the business to third parties who don't share our objectives of creating long term value for shareholders."
Share price boost
GKN’s share price rose last week on the strength of takeover talks and they also rose in mid-morning trading today as Melrose upped the ante in its chase for GKN. The share price was up just over 3.5% to 435.12
Analysts at Berenberg expect Melrose to return with a higher offer for GKN and for it to be accepted
The rejected 405p bid undervalues GKN, but Berenberg believes Melrose has scope to significantly increase its offer by the 9 February deadline.
Berenberg has raised its price target to 455p, a level that it thinks shareholders will be hard-pressed to reject.
Melrose’s management can point to a strong track record in turning around underperforming industrial names. Assuming the offer is increased (possibly at 455p), GKN shareholders will then have to decide which team it trusts most to create maximum value.
Melrose expects to improve GKN’s margins to above 10%, which compares to Berenberg’s model of 7.8% in 2017 rising to 9.0% in 2020.
All else being equal, a through-cycle margin of 10% from 2020 increases Berenberg’s current 445p DCF valuation to 502p, while a 10.5% margin generates 531p.
Excluding any premium factor for break-up scenarios, Berenberg’s total valuation based on peer average multiples is 405p, 4% below the close on Friday. Bernberg sees this as the downside scenario if Melrose does not return with a higher offer.
Good for UK industry?
While shareholders and City watchers may be amenable to a Melrose takeover of GKN, there are concerns in Westminster that this aggressive bid does not represent good value for the UK engineering sector.
Liberal Democrat leader Vince Cable has called on Business Secretary Greg Clark to block the takeover on the grounds that: "GKN stands for long term investment in advanced manufacturing whereas Melrose are in the business of short-term financial engineering."