GKN sends letter to shareholders warning over ‘opportunistic’ bid by Melrose
GKN called Melrose’s offer ‘low price and high risk’.
GKN has written to shareholders to warn over the “entirely opportunistic” takeover bid by Melrose, saying its inexperienced management team and short-term business model are “inappropriate” for the business.
The engineering giant’s letter detailed shortcomings of Melrose’s £7.4 billion offer while highlighting the benefits of its new strategic plan.
“The Melrose offer is not a good deal – it is low price and high risk,” the letter, signed by GKN chairman Mike Turner, said.
“On the basis of its most recent share price, Melrose claims its premium is 22%.
“By comparison, precedent FTSE 100 takeovers have an average premium of 43%,” he explained, adding that Melrose has paid “materially higher premiums in each of its prior public takeovers”.
It is your board’s belief that this offer is entirely opportunistic and that the terms fundamentally undervalue GKN GKN letter to shareholders
He also pointed to Melrose’s “weaker” credit profile and “materially higher proposed leverage” as a point of risk for shareholders, while claiming that the turnaround specialist’s management team “lacks relevant experience” and that “its short-term business model is inappropriate for GKN”.
“Firstly, Melrose has very limited experience in the aerospace and automotive industries, having exited both sectors more than six years ago.
“As a result, there is no evidence that Melrose’s management has relationships with key customers such as Airbus, Boeing, Fiat Chrysler, Ford and VW.
“Furthermore, Melrose’s stated three-to-five-year exit strategy is not compatible with the long-term investment and technology horizons that are essential in GKN’s markets.”
GKN went on to say that the turnaround specialist is “more focused on financial engineering than real engineering”, and that its profitability was not easily understood given the way it booked research, development and provisioning.
“It is your board’s belief that this offer is entirely opportunistic and that the terms fundamentally undervalue GKN,” the letter explained.
The company also spelled out the benefits of its new strategic plan, which will see GKN sell off parts of its business to fund a £2.5 billion payout to shareholders and introduce new targets for its different business segments to help deliver a recurring annual cash benefit of £340 million from 2020.
That will include the sale of its Powder Metallurgy business, which reports say could be valued at over £2 billion.
GKN is also launching a dividend policy aiming to pay out 50% of its free cash flow between 2018 and 2020.
“GKN has been successful in building global businesses and delivering above market growth which has created a company with annual sales in 2017 of £10.4 billion,” Thursday’s letter said.
“However, this has at times been at the expense of maximising margins and cash generation.
“The board has recently appointed two highly qualified new executive leaders who are addressing this.”
The strategic plan – the details of which were revealed on Wednesday – was criticised by Melrose, which said it was “long on adjectives and promises but desperately short on detail”.
Commenting on GKN’s letter, Melrose chairman Christopher Miller said it was “another attempt to distract from the real issue”.
“Quite simply, can a GKN board with a self-confessed record of under-performance be trusted to re-invent itself into an agent of fundamental cultural change? We firmly believe the GKN team cannot.”
He said Melrose has a proven track record in helping build up sustainable businesses, and assured the company “will not cut corners in making the necessary investment that we believe GKN’s businesses need”, and would not “indulge in a hasty fire-sale of the businesses the GKN board has identified as non-core”.
“We are a quoted British company which finances itself on investment grade terms. We are an impeccable custodian of pensions. We recognise the importance of all GKN stakeholders,” he added.
“We believe shareholders will view today’s document as a sideshow and focus instead on the main issues of value creation and responsible ownership, in which Melrose excels.”