GKN makes latest play in Melrose takeover ping-pong

The FTSE 100 company’s board said it continued to view the offer from Melrose as “entirely opportunistic”, and believed that its terms fundamentally undervalued GKN and its prospects.

On Wednesday, GKN outlined a strategy named ‘Project Boost’, which would see £2.5bn distributed to shareholders over the next five years, in a bid to tempt shareholders away from the £1.4bn carrot being dangled by Melrose.

Melrose was quick to return fire, however, issuing a statement noting that its offer had already delivered £1.3bn of improved value to GKN shareholders, with another £1.4bn guaranteed on completion of their proposed offer, as opposed to the possibility of £2.5bn over five years should GKN’s new strategy go to plan.

“With [our] new plan, we expect to deliver £340m recurring annual cash benefit from the end of 2020,” noted GKN chairman Mike Turner in his letter to shareholders on Thursday, once again playing the numbers game.

“As a GKN shareholder, you will receive 100% of this benefit.

“If Melrose acquires GKN, it would have to generate 1.76x the level of improvement that GKN would have to deliver in order to give you, as a shareholder, the same future benefit.”

Turner explained that was because accepting Melrose shares would dilute GKN shareholders’ ownership of the GKN business from 100% to 57%.

He also noted that Melrose was offering 7.9x GKN's 2017 EBITDA, which he claimed was a discount compared to average multiples of “comparable transactions”.

Applying precedent transaction multiples would imply a value substantially in excess of Melrose's offer, Turner said.

“The premium Melrose is offering is very low,” he added, noting that on the basis of its most recent share price, Melrose claimed its premium was 22%.

“By comparison, precedent FTSE 100 takeovers have an average premium of 43%.

“Melrose has also paid materially higher premiums in each of its prior public takeovers,” Mike Turner wrote, adding that in the case of FKI - Melrose's only prior UK public takeover - the premium was 72%.

“Furthermore, GKN believes that Melrose's stated premium of 22% is misleading.

“Melrose's market capitalisation is significantly smaller than GKN's, the offer is 80% in shares and Melrose brings no industrial synergies.

“As a result, GKN shareholders are funding most of the premium themselves, resulting in an actual premium of 10%.”

Mike Turner advised shareholders once again to take no action, adding that the board - which had been advised by Gleacher Shacklock, J.P. Morgan Cazenove and UBS as to the financial terms of the offer, believed that Melrose's offer “fundamentally undervalues” GKN.

“The board unanimously recommends that you should take no action in relation to the offer and that you should not sign any document which Melrose or its advisers send to you.

“Your directors will not be accepting Melrose's offer in respect of their own beneficial shareholdings.”