Outcome of Melrose takeover bid for GKN still too close to call
London Briefing: As Thursday deadline looms, fears of Melrose short-termism persist
Flags outside GKN HQ in Redditch, UK. Phtotgraph: Reuters
Sometime before 5pm on Thursday, the verdict will be delivered on the biggest hostile takeover bid the City has seen in almost a decade – the £8 billion (€9.15bn) battle for control of engineering group GKN.
Even at this late stage, the outcome of the cash and shares offer from restructuring firm Melrose is too tight to call, and both sides are determined to press home their cases right up to Thursday’s lunchtime deadline.
The battle between the two has stirred up politicians, who fear Britain’s industrial heritage is at risk and have demanded that the business be protected. In Westminster, the hostile offer is seen as a battle between the short-termism of the financial engineer – Melrose – versus the long-term investment of the real engineer – GKN.
The Daily Mail, meanwhile, has been invoking the wartime spirit in its attempts to persuade shareholders to remain loyal, harking back to GKN’s role in producing the Spitfire fighter aircraft and tanks for the D-Day landings during the second World War. It has urged investors to save this “British colossus” from the Melrose “vultures”.
That’s a reference to the Melrose business model of identifying underperforming businesses, turning them round and then selling them on for a large profit.
Since it was founded in 2003 – more than two centuries after GKN – Melrose has established a good rapport with the City, not least because of the large payouts it has made to investors. And it has earned a reputation for delivering on its promises.
Once known as Guest, Keen and Nettlefolds, GKN is one of Britain’s biggest and oldest engineering firms, tracing its origins back to the dawning of the Industrial Revolution 259 years ago. It employs about 6,000 people in the UK and almost 60,000 worldwide.
The FTSE 100 group undoubtedly boasts a proud industrial heritage, but it has made a series of mis-steps in recent years. This culminated in a shock profit warning last November on the back of problems in its US aerospace operation, leading to the ousting of the group’s new chief executive (who headed the aerospace division) before he’d even had a chance to take up his new job.
So when Melrose swooped with its opening bid in January, the engineering giant was effectively a sitting duck. It has put up a more spirited defence than many in the City had expected. It certainly looked to have pulled off a coup a couple of weeks ago when it succeeded in getting its largest single customer – Airbus – to publicly state that it would take its business elsewhere if Melrose were to succeed in its offer.
At the behest of GKN, the European aerospace group made clear its view that the industry was not suited to what it viewed as Melrose’s “short-term financial investment”.
But there is a feeling that GKN’s new management team may have over-reached themselves with their defensive plan to break up the business themselves rather than letting Melrose do the job.
Business secretary Greg Clark staged an 11th hour intervention in the three-month bid battle on Tuesday, demanding a number of assurances from Melrose, which swiftly responded by promising it would maintain GKN’s headquarters, workforce and share listing in the UK; that it would continue to pay UK tax, invest in R&D and fund the company’s pension scheme.
In addition, Melrose chief executive Simon Peckham committed to retaining GKN’s strategically important aerospace division for at least five years.
Under City takeover rules, these promises are legally binding, although they failed to impress the unions who remain fiercely opposed to the bid. Unite’s Steve Turner dismissed the assurances as “unenforceable, short-term and completely inadequate”.
With GKN planning to sell a huge chunk of the business itself, via a £4.4 billion deal on its car parts operations with the US firm Dana, the government should perhaps be seeking similar commitments from the bid target, not just the bidder.
It’s been a messy takeover battle. Just this week GKN was forced to retract unsubstantiated statements of shareholder support made by senior executives in the weekend press.
New chief executive Anne Stevens said she was “convinced” investors would back the company’s independence while finance director Jos Sclater said the company’s long-term investors were “mostly supportive”. GKN was obliged to admit on Monday that the statements had not been verified “and are hereby retracted”.
On Thursday we’ll know whether they were right. But it’s a tough call. Melrose has reduced its minimum target for acceptances from 90 per cent to anything over 50 per cent, and the final result could be very close indeed.
Fiona Walsh is business editor of theguardian.com