GKN requires investment – not self-immolation by its own management

GKN requires investment – not self-immolation by its own management

by Brian Monteith
article from Monday 26, March, 2018

GKN IS A WORLD-RENOWNED British business but it is underperforming and its current management admits this is the case, having issued two profit warnings in 2017 and now panicking into sales of its assets.  In such circumstances one would expect that when a bid for GKN might be forthcoming they would look to evaluate it, see if it could be improved upon, possibly bargain for some changes and then either recommend or reject it. That would be the behavior of a good management.

When Melrose – the British transformation specialists who have turned around many companies, including some larger than itself – made overtures to GKN they were rejected and branded as a “hostile” takeover. Now the £8.1 billion bid by Melrose will close on Thursday at 1.00 pm and we shall know if shareholders have decided the Melrose offer is attractive enough and is the best plan to give it their backing.

When I see the likes of Unite campaigning against the Melrose bid – and talking of saving British jobs and protecting British security – I immediately recoil. Wrapping a company in the Union Flag is the last refuge of charlatans with no argument. 

When I read up on how GKN is preparing to sell its Driveline and Powder Metallurgy divisions to overseas competitors it struck me that by its own logic the target of Unite’s ire should be GKN, not Melrose. Unite's support or opposition on most matters is for me a weather vane to do the opposite – and on the Melrose bid for GKN its truculent leaders have not let me down.

How ironic that Melrose is demonised – for being similar to an asset-stripping hedge fund – when it is GKN’s own management that is prepared to sell the prized assets below market value. Proof of its ineptitude came when the proposed purchaser of Driveline, US automotive firm Dana, upped its offer by a further $140m, exposing GKN’s earlier willingness to accept a below par trade. In contrast Melrose intends to retain the GKN brand name on GKN Driveline and GKN Aerospace so that the reputation of the company is developed, not diminished.

In this commercial decision the Union Jack is a false flag. Melrose is a British company, UK listed and headquartered, and its proposal is for a British GKN-Melrose, with a British board owned by largely British-based institutions, representing pension funds, local authorities and insurance companies. Melrose has a track record of investing in R&D, skills and training – having invested £230m in R&D and £250m in capital investment improvement over the last five years – and especially important for GKN, Melrose has experience in rebuilding pension funds.

As a turnaround specialist Melrose has managed four substantial acquisitions over the last fifteen years: McKechnie/Dynacast, a combined acquisition of McKechnie, a supplier of specialist engineered components to the global aerospace industry, and Dynacast, a global provider of precision die cast components for a wide variety of engineering industries; FKI, a UK publicly-listed conglomerate including energy, lifting and industrial divisions – which was at the time more than double the size of Melrose; Elster, a US publicly-listed, German-based manufacturer of meters operating through three separate divisions with different markets and drivers (Gas, Electricity, Water); and Nortek, a US publicly listed, US-based group which manufactures innovative air management, security, home automation and ergonomic and productivity solutions – which was, at the time almost quadruple the size of Melrose.

Melrose’s offer is for the long term – retaining current operations to rebuild them into the engineering powerhouse of before. The GKN management’s response is short term, realising below market value assets to win over shareholders now – and then risk carrying the burden of a heavy pension liability on a smaller company base. 

The sale of Driveline to the US company Dana will see it listed and headquartered in Ohio, with a foreign management team whose loyalties are to making America great again.  Together with the sale of the Powder Metallurgy the remaining GKN aerospace business could face having gross pension liabilities as much as ten times of the aerospace profits – a ratio three times the average for the FTSE 100. In all its stewardship of businesses Melrose has left the pension funds better than it found them, and it has detailed plans to do the same with the new GKN company. Initiatives include putting £1bn into the pension fund and and ensuring rising annual contributions will in time see it return to being fully funded.

In the end the choice for shareholders is do they trust the management that have let GKN slide and who have little shareholding themselves – or do they trust the Melrose management, who have impressive experience of turning companies around and have a stake in the businesses they run?  Making GKN a world-beating engineering firm – that raises shareholder value and improves dividend potential – must be the goal. Only by building the company up rather than stripping it down can GKN be seen as world class again.

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