Melrose begins shareholder meetings to discuss GKN proposal

Melrose Industries, whose £7bn offer for engineering group GKN was rejected last week, said on Monday that it is beginning a series of shareholder meetings to discuss the proposal.

An investor presentation is available on the company’s website, which describes GKN's current position as “an overly complex and under-managed organisation without focus which needs a fundamental change of culture and leadership”.

Melrose pointed out that GKN has underperformed the FTSE350 total shareholder return by around 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 by approximately 18 times.

It added that £1 invested in a Melrose share since flotation would be worth £17.70 at present.

It also noted that GKN has a history of missed margin targets since 2011. It said that if GKN were to achieve the top-end of its stated divisional target trading margins in 2017, group trading profit for this period would be approximately £300m 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. Melrose said that the lost opportunity is despite GKN having spent approximately £3.2bn on capex and acquisitions between 2012 and 2016.

Chief executive Simon Peckham 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."

GKN said on Friday that it had rejected a bid proposal from Melrose and appointed Anne Stevens as chief executive, as it announced plans to separate its aerospace and automotive businesses.

It said that the bid, at 405p per share, was "entirely opportunistic and that the terms fundamentally undervalue the company and its prospects".

According to The Times, private equity firm Carlyle may be interested in making a bid for GKN. City sources were cited as saying that interest had intensified in recent months amid pressure on the supplier’s share price after two profit warnings.

Mike van Dulken at Accendo Markets said the statement from Melrose suggests it may be looking for the nod from major shareholders to either better the existing 21.7% premium offered versus Thursday's price or take things hostile in order to seek control.

"In our view, a combination of the two is likely. Firstly because an opening approach is rarely what is ultimately agreed to (and because 25%+ is normally required as a control premium). Secondly, the language employed by Melrose in a presentation now available on its website is highly critical, suggesting the target is 'overly complex and under-managed organisation without focus which needs a fundamental change of culture and leadership'. Much highlighting of relative share price underperformance is also clearly aimed at convincing suitor shareholders of GKN management’s failure to deliver value and that better profitability can be had within the newly proposed new structure, especially following a brace of Autumn profits warnings and change at the top and decision to split the business.

"That said, GKN shares trade fresh record highs while Melrose sits 13% from its June record peak. And despite Melrose’s outperformance, markets are fully aware that past performance is no guarantee of future performance and a transaction is not without risk. While Melrose shares rose 5.8% on Friday, welcoming the potential tie-up, they are down 1% today, shareholders perhaps digesting the risk that it ends up overpaying. GKN shares may also be higher on reports that private equity giant Carlyle may be considering a counter-bid that triggers a bidding war."

Meanwhile, Berenberg hiked its price target on GKN to 455p from 365p, keeping the rating at 'buy'.

"There is an air of inevitability that GKN will end up being owned by Melrose. The rejected 405p bid undervalues GKN, in our view, but we believe Melrose has scope to significantly increase its offer by the 9 February deadline. We raise our price target to 455p, a level that shareholders will be hard-pressed to reject. There is also the prospect of a counter-bid emerging, with Carlyle reported in the weekend press to be potentially interested. We remain buyers."

At 1250 GMT, GKN shares were up 4.2% to 437.70p, while Melrose shares were up 1% to 230p.