Melrose puts GKN in play ....

Friday, Jan 12 2018 by
5

Couple of interesting RNS this morning. GKN (LON:GKN) trading statement with a rebuttal of an unsolicited cash and shares offer by specialist engineering restructurer Melrose Industries (LON:MRO) valuing GKN (LON:GKN) at 405p followed by a confirmation from Melrose Industries (LON:MRO) of their interest.

https://www.investegate.co.uk/gkn-plc--gkn-/prn/statement-re-possible-offer/20180112075900P78C9/

https://www.investegate.co.uk/melrose-industries--mro-/rns/response-to-statement-re-possible-offer/201801121021417437B/

Noteworthy that both shares have gone up (increasing the value of the Melrose Industries (LON:MRO) paper in the offer to GKN (LON:GKN) shareholders). Also, it’s a big bite for Melrose Industries (LON:MRO) and will give GKN shareholders a majority 57% in the new company. Doesn’t look to be a knock out bid at this stage so may see the ante increased and/or another bidder coming to the party.

(I hold Melrose Industries (LON:MRO) shares).

Gus.


Filed Under: Industrials,

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GKN plc is a global engineering company. The Company is engaged in the design, manufacture and service of systems and components for original equipment manufacturers. The Company operates in four segments: GKN Aerospace, GKN Driveline, GKN Powder Metallurgy and GKN Land Systems. The GKN Aerospace segment is a supplier of airframe and engine structures, landing gear, electrical interconnection systems, transparencies and aftermarket services. The GKN Aerospace segment is a supplier of airframe and engine structures, landing gear, electrical interconnection systems, transparencies and aftermarket services. The GKN Powder Metallurgy segment is a manufacturer of sintered components and a producer of metal powder. The GKN Land Systems segment is a supplier of power management products and services. It designs, manufactures and supplies products and services for the agricultural, construction and utility vehicle markets and industrial segments. more »

LSE Price
422.3p
Change
0.9%
Mkt Cap (£m)
7,191
P/E (fwd)
12.9
Yield (fwd)
2.3

Melrose Industries PLC is a United Kingdom-based company that is engaged in buying manufacturing businesses. The Company’s businesses include Nortek and Brush Turbogenerators. It operates through four segments: Energy, which includes the Brush business that is engaged in supplying energy industrial products; Air Management, which includes the Air Quality & Home Solutions business that manufactures ventilation products and the Heating, Ventilation & Air Conditioning business that manufactures and sells split-system and packaged air conditioners, heat pumps, furnaces, air handlers and parts; Security and Smart Technology, which includes the Security & Control business along with the Core Brands and GTO Access Systems businesses; Ergonomics, which includes the Ergotron business that manufactures and distributes products designed with ergonomic features including wall mounts, carts, arms, desk mounts, and stands that attach to or support display devices. more »

LSE Price
226.7p
Change
0.9%
Mkt Cap (£m)
4,364
P/E (fwd)
21.4
Yield (fwd)
1.9



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24 Posts on this Thread show/hide all

Cisk 12th Jan 5 of 24
4

I have shares in both companies (and have done ages) so am completely unbiased!

I think Melrose might be forced to offer more, but they are very disciplined and won't overpay. Suspect that this will now flush out another bidder, which will probably be overseas.

GKN is a great company that has lost its way. Melrose are not asset strippers, they invest in businesses and turn them around. The GKN management certainly need a kick up the backside, e.g. the recent US write downs are not good and shouldn't have happened in the first place. In aerospace you need to make hay while the sun shines as it's such a cyclical business. Their margins should be rising not falling at the time of record order books in the industry.

And all the talk of electric cars replacing the ICE is just that - talk. It will take a long time and require leaps in technology to make manufacturing an expensive, polluting battery efficient and environmentally friendly. Besides even electric motors still require drivetrains, brakes etc, so it's not like the market is suddenly going to disappear for the automotive side.

Haven't seen the comment from Cable but the point is you need to be both: a proper engineer and manage the business well. Otherwise you'll be like Rolls in the 70s and go bust and have to be bailed out.

IMHO this is exactly what GKN needs, some external pressure to get the company back on track.

The takeaways from this for me are:
1) Nortek acquisition by MRO must have gone well for them to be considering this deal now;
2) GKN are undervalued and this bid is the catalyst for the sp to appreciate
3) MRO is the best way for GKN to remain in British hands.

Personally I had hoped that KGN would merge / buy Senior as I think they would be a good fit, and a lot of costs could be stripped out. Maybe that could happen as an alternative....

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gus 1065 15th Jan 6 of 24
1

Gloves are off with this morning’s punchy RNS from Melrose Industries (LON:MRO) going on the offensive against GKN (LON:GKN) management’s poor track record. Also a bit in the weekend press with ST reporting US PE house Carlyle may come in as a bidder and a talking head on Radio 4 Today program extolling Melrose management’s performance in turning around engineering companies.

Gus.

———————-

15 January 2018

Melrose Industries PLC ("Melrose")

GKN plc ("GKN") - unlocking the potential

Further to the announcement on 12 January 2018 of the terms of a proposal made by Melrose to GKN in relation to a possible offer by Melrose for GKN (the "Proposal"), Melrose confirms that it is today commencing a series of shareholder meetings to discuss the Proposal.

An investor presentation (the "Presentation") has been prepared and is available on the Melrose website. The Presentation describes GKN's current position as an overly complex and under-managed organisation without focus which needs a fundamental change of culture and leadership.

GKN has underperformed the FTSE350 total shareholder return ("TSR") by approximately 26% since the flotation of Melrose in October 2003 and ranks 227th amongst the existing index constituents. By contrast, Melrose is the third best performing FTSE350 company in terms of TSR for the same period and has outperformed GKN's TSR by approximately 18 times.

£1 invested in a Melrose share since flotation would be worth £17.70 today.

GKN has a history of missed margin targets since 2011 which the Presentation highlights. If GKN were to achieve the top-end of their stated divisional target trading margins in 2017 (as set out in its 2011 full year results announcement and since repeated), the group trading profit for this period would be approximately £300 million higher than consensus. The consensus group trading margin for the full-year 2017 is 7.7% which is the same as the full-year 2011. The lost opportunity is despite GKN having spent approximately £3.2bn on capex and acquisitions between 2012 and 2016.

Melrose has stated that it expects to 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.

Simon Peckham, Chief Executive of Melrose, said: "We are aiming to put into sharp focus the options for GKN shareholders. 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. 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."





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gus 1065 17th Jan 8 of 24
2

Also noteworthy that Melrose Industries (LON:MRO) have gone “hostile”, i.e. are not seeking a recommendation from the GKN (LON:GKN) board. Quite a punchy (and unusual in recent times) approach in that they won’t get access to the GKN books prior to the shareholder vote so are taking the risk that the company is a can of worms. This suggests either they’re very confident in their arms length due diligence and/or that they’re getting the company at a significant discount to what they think they can make it worth. Risk is slightly mitigated by the fact that only 81p of the offer is being made in cash (the rest in shares in the new entity) but even so shows admirable cojones.

Game on.

Gus.

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stocko616 17th Jan 9 of 24
1

Normally Melrose get existing shareholders to dob in cash to fund increased share capital when they make bids. Does anybody know if this will happen this time round?

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gus 1065 17th Jan 10 of 24
1

I haven’t heard/read anything about an equity placement but agree it is likely.

A quick and dirty review of the numbers suggests Melrose Industries (LON:MRO) will need to raise 81p x 1.71bn GKN (LON:GKN) shares (probably plus a few for any outstanding share options etc.) plus M&A fees and expenses so not much change out of £1.75bn. They only have about £40m in cash and unlikely they can raise this kind of capital from sale of other assets. Possibly more funding required if Melrose Industries (LON:MRO) have to up the cash part of the bid to win over shareholders/fend off another bid.

As I recall, Melrose Industries (LON:MRO) would need to have confirmed funding in place before making an offer, suggesting their backers already have confidence that the term debt and equity are in place to take out any acquisition bridge facility. I suspect institutions are already lined up to provide this although there may well be some form of PI tranche or wider rights issue if it looks like the offer will progress. Makes the decision to go hostile all the more impressive IMO.

Gus.

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stocko616 17th Jan 11 of 24

Thanks Gus. Time to open my piggy bank! I think your figure of 1.75bn is around £1 fore each Melrose Industries share.

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JohnEustace 17th Jan 12 of 24

In reply to stocko616, post #9

Melrose Industries (LON:MRO) funded their Nortek acquisition by way of a £1.6bn rights issue so I'm anticipating them tapping up shareholders again this time as well as taking on debt.
I've purchased a small amount expecting to be invited to buy more - that worked out very well for me with Nortek. I think the 5% increase in their share price on the day of the initial announcement may have been driven by others doing the same on a larger scale than me.

Edit: Looking back at the Nortek acquisition, that was a cash offer and the rights issue was mentioned upfront. For GKN they are offering a combination of New Melrose shares and cash, so things may play out differently this time.

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gus 1065 17th Jan 13 of 24

In reply to stocko616, post #11

Hopefully they won’t have to pay out too much additional cash. Getting this amount of debt and equity underwritten plus associated M&A success fees, legal fees, disbursement’s etc. could easily clock up £200m+ on a c.£7bn+ total transaction. If they need to sweeten the offer, they may decide to offer the GKN shareholders more than the 57% of the total equity currently on the table.

Gus.

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gus 1065 18th Jan 14 of 24

GKN (LON:GKN) rebuttal of the Melrose Industries (LON:MRO) bid. Much as expected, “It’s our company, they’re chancers trying it on, they’re using our balance sheet to raise the acquisition price, we can do better as management than they can, please reject”.

Hostile bids are rarely pretty - a bit like a messy divorce. No killer punches landed by either side yet IMO.

https://www.investegate.co.uk/gkn-plc--gkn-/prn/statement-re-rejection-of-unsolicited-offer/20180118073622P3C3C/

Gus.

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gus 1065 18th Jan 15 of 24
2

Apologies if this is getting dull for those without a vested interest, but here is the latest iteration in the ping pong, this time Melrose Industries (LON:MRO) rebutting GKN (LON:GKN) this morning. Fair play to Melrose Industries (LON:MRO) in that as they state below, they’ve already added more to GKN (LON:GKN) shareholder value (104p per share) than GKN (LON:GKN) management have in the past several years.

Gus.

———————

18 January 2018

Melrose Industries PLC ("Melrose")

Statement regarding its offer for GKN plc ("GKN")

Melrose has noted the statement earlier today from GKN.

The real premium for GKN shareholders is reflected in the current share prices of GKN and Melrose, both of which have risen substantially since the announcement of Melrose's approach by the Board of GKN.

Under the terms of the offer from Melrose, GKN shareholders will collectively have:

· 57% of GKN's business and the uplift in value which the Melrose management expect to create; and

· 57% of the existing Melrose group and the value uplift which the Melrose management expect to create in those businesses; and

· £1.4 billion in cash which they can invest in existing Melrose shares if they wish to increase further their shareholding in the enlarged group.

Simon Peckham, Chief Executive of Melrose, said:

"In less than a week shareholders have seen 104 pence per share or £1.8 billion added to the value of GKN which shareholders can, if they wish, realise today in the market. Melrose's actions have done that, not GKN's management.

Melrose believes that the shareholders of GKN are best placed to judge which management team is better equipped to deliver the greatest value to shareholders of GKN."

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David Burbidge 18th Jan 16 of 24

In reply to gus 1065, post #15

Thanks Gus, still sitting on the fence watching, erring on the side of selling GKN, will see what the morning brings.

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gus 1065 1st Feb 17 of 24
1

Melrose Industries (LON:MRO) will today (the first scheduled day on which it can be under Takeover Code) publishe its offer document for GKN (LON:GKN). Prompt delivery suggests they are well ahead with their planning. I suspect it will be a pretty weighty tome when it hits the doormat.

The document is not yet on the website, but presumably the offer is on the same terms as the initial announcement. Some noise in the weekend press about the institutions thinking this is an initial offer price with headroom (in the cash component) for more but might just be wishful thinking. Melrose Industries (LON:MRO) seem to be winning the hearts and minds war in the media at the moment but still early days.

Gus.

—————-

Publication of Offer Document and Prospectus Equivalent Document

Letter to GKN Shareholders from the Chairman of Melrose



The board of Melrose Industries PLC ("Melrose") is pleased to announce that the offer document containing full terms and conditions of its firm offer to acquire the entire issued and to be issued share capital of GKN plc ("GKN") (the "Offer") and the procedures for its acceptance (the "Offer Document") is being posted to the shareholders of GKN later today and will also be published on Melrose's website (www.melroseplc.net) later today, together with a prospectus equivalent document containing details of Melrose as enlarged by the acquisition of GKN (the "Prospectus Equivalent Document"). The Offer is subject to the terms and conditions set out in the Offer Document.

A letter from the Chairman of Melrose to GKN shareholders as set out in the Offer Document has been extracted below.

Click on, or paste the following link into your web browser, to view this announcement and the letter from the Chairman as a PDF document.

http://www.rns-pdf.londonstockexchange.com/rns/5665D_1-2018-2-1.pdf

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gus 1065 1st Feb 18 of 24

GKN (LON:GKN) response to Melrose Industries (LON:MRO) announcement for the record. No surrender ....

https://www.investegate.co.uk/gkn-plc--gkn-/prn/response-to-offer/20180201083217P8685/

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gus 1065 Thu 7:28am 19 of 24
2

For the record, link to the response document from GKN (LON:GKN) confirming their rebuttal of the unsolicited Melrose Industries (LON:MRO) bid. Supplements GKN management’s own Project Boost break up plan published yesterday. Seems to be boiling down to a beauty parade on the merits of the two management teams to shake up and improve the recent GKN (LON:GKN) underperformance.

https://www.investegate.co.uk/gkn-plc--gkn-/rns/publication-of-response-circular/201802150700049359E/

Currently waiting on GKN (LON:GKN) update on last year’s trading (expected on or around 27/2) which may include (potentially embarrassing) details of further write downs in some of their businesses. Interested to see how this will be spun by both sides. Things starting to warm up a little.

Gus.

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gus 1065 Thu 2:50pm 20 of 24
1

...... and in return, Melrose Industries (LON:MRO) response to the GKN defence.

https://www.investegate.co.uk/stadium-group-plc--sdm-/rns/recommended-cash-offer/201802150701079681E/

Basically, a detailed rebuttal on its way but in the meantime here are a few inaccuracies in the GKN defence document that misrepresents Melrose’s position and continues to focus on sales rather than profit. An old dog that can’t be expected to learn new tricks (under current management).

Gus.

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aflash Thu 3:02pm 21 of 24
1

In reply to gus 1065, post #20

Of more interest to me are the number of institutions declaring short positions in MRO (Melrose).

Incidentally your link takes us to the offer for SDM Stadium. Correction needed.

Maybe addition of short declarations too. I am too lazy....

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gus 1065 Thu 6:03pm 22 of 24
2

Thanks for picking that up. Correct link below:-

https://www.investegate.co.uk/melrose-industries--mro-/rns/statement-re-gkn-defence-document/201802151100140123F/

Current short interest in Melrose Industries (LON:MRO) is 9.63% (of those notified above 0.5%) so probably slightly higher. Looks to be mostly hedge funds although Blackrock also in the mix. Largest single position is 1.75% (Davidson Kempner).

https://shorttracker.co.uk/company/GB00BZ1G4322/

No one currently declared a short position in the target, GKN (LON:GKN).

https://shorttracker.co.uk/company/GB0030646508/

Gus.


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timarr Thu 6:53pm 23 of 24

If Melrose Industries (LON:MRO) loses I assume their share price will drop, given the extra debt and execution risk so this could be a bet on Melrose Industries (LON:MRO) winning. Or it could be a hedge against them losing - Blackrock are one of their largest shareholders.

So the shorters are betting that GKN (LON:GKN) loses?

Interesting ...

timarr

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gus 1065 Tue 7:31am 24 of 24
2

Full year audited results out for Melrose Industries (LON:MRO) this morning.

https://www.investegate.co.uk/melrose-industries--mro-/rns/final-results/201802200700043300F/

The fact they’re already audited and out seems to confirm Melrose Industries (LON:MRO) are on top of their businesses. Something for both sides in the GKN (LON:GKN) battle. Very impressive turnaround at Nortek. Still problems at Brush which is being restructured/downsized. Lots of detailed analysis of the constituent parts and specific commentary on the state of the various pension liabilities (with a nod to one of the previous lines of attack from GKN (LON:GKN) ).To my mind this demonstrates they are decent stewards of the businesses they buy to develop. Look forward to seeing the GKN (LON:GKN) spin on things and their own results in due course.

Gus.

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