GKN is “an overly complex and under-managed organisation without focus which needs a fundamental change of culture and leadership”. At least that’s the view of turnaround specialist Melrose Industries, which has the troubled FTSE 100 engineering group firmly on its acquisition radar.

In a presentation published on Monday targeting GKN shareholders, Melrose claimed that GKN has underperformed the FTSE 350 Total Shareholder Return (TSR) index by 26% since 2011. Despite spending £3.2bn on capex and acquisitions, it has “a history of missed margin targets since 2011”.

Melrose believes it can “re-energise and re-purpose GKN’s operations” to exceed the existing top-end trading margin target of 10%, from around 8% currently. My calculations suggest that if this was the case, H1 operating profit would have been roughly £521m, 20% higher than the £436m reported last July.

The other side of the story

In its response to the original bid approach, GKN’s said that the Melrose offer of 405p per share was “entirely opportunistic” and “fundamentally” undervalued the company.

--

Update 17/01/2018: Melrose is going hostile and has just made a firm offer for GKN worth 430p per share. https://www.investegate.co.uk/...

--

In fairness, I suspect the view held by GKN's board is correct. Melrose has turned £1 into £17.70 for its shareholders since its flotation in 2003. For GKN, the equivalent figure is £2.40 (plus dividends). If Melrose is prepared to pay 430p per share for GKN, I think it’s probably safe to assume that GKN could be worth significantly more.

Instead of pursuing a deal with Melrose, GKN’s board wants to realise this value by splitting the group into separate aerospace and automotive companies, a move that some shareholders have been calling for for some time. Like Melrose’s board, GKN’s new chief executive Anne Stevens sees a need for cultural change alongside operational and strategic changes.

The question for shareholders is which approach is likely to realise most value from GKN’s businesses. The track record of the group’s existing management is fairly uninspiring when compared to that of Melrose. But the decision to split GKN could tempt investors who want to retain the option of investing directly in its businesses.

All of this has become relevant to me this week because GKN is now the top-ranked qualifying stock in my SIF screen results. This means that I’m…

Finish reading with a 14 day trial

or Unlock with your email

Already have an account?
Login here