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GKN plans £2.5bn shareholder payout to fight off Melrose

Alan Tovey
A GKN employee in one of the company's aerospace plants - Copyright 2012 Bloomberg Finance LP

GKN aims to return £2.5bn to shareholders over the next three years, with the cash payment forming the key plank of its strategy to fight off hostile suitor Melrose.

The automotive and aerospace parts manufacturer’s management announced the payout in their “defence document” detailing how they intend to keep control of the business, after receiving a £7.4bn bid from turnaround investor Melrose.

In the defence plans Anne Stevens, chief executive, described GKN - which has revenues of £10bn a year - as having “world-class businesses and technology, [we] now intend to move towards world-class financial performance”.

The payout GKN is offering is worth about 150p per share in the company. Prior to Melrose’s approach GKN shares were at 326p, but shot up to close to 450p on news of the approach. Melrose has made a 20pc cash and 80pc shares offer worth about 405p at current prices. If investors back the bid, they will get an 81p cash payout and be left with 57pc of the combined company.

GKN

Ms Stevens’ strategy to improve financial performance - known as Project Boost - aims to split GKN’s two main aerospace and automotive business, and focus on different products within them with tailored  targets and investment plans.

Management will also be shaken up, with a greater emphasis on accountability and delivering production improvements, with incentives to back this up.

Jobs are likely to go as GKN streamlines, but the company said that “over 40pc of the benefits are driven by world-class process improvement, implementing Industry 4.0 and addressing underperformance in the US aerospace business. The remaining benefits are derived from improved procurement processes, and other functional savings.

“The nature of the programmes mean that there will be minimal jobs losses to achieve these benefits, but there will be an adjustment in working practices required to adopt the leading edge technologies.”

GKN chief executive Anne Stevens said the company has been overly focused on growth

These measures are set to deliver annual cash of £340m from the end of 2020 which will help fund the £2.5bn payout, but GKN will also sell off parts of the business to help finance it. The bulk of this is likely to come from the powder metallurgy division, the highest margin unit of GKN, which management expect to dispose of within 12 to 18 months.

The dividend policy will also be increased, with a target of returning 50pc of free cash flow to investors from 2018 to 2020.

In the past GKN had made mistakes, Ms Steven acknowledged, opening up the opportunity for Melrose to pounce. “Too often we pursued growth at the expense of returns, this will no longer be the case,” she said. “The new strategy brings discipline, both financial and operational.”

Delivering Project Boost will also mean “meaningful sustainable cash flows over the mid to long term” she added.

GKN's automotive business is reckoned to have parts in every other new car in the world

Melrose’s bid criticised GKN management, claiming they had failed to hit profit targets and deliver growth despite spending £3.2bn on acquisitions. The suitor - which operates on a “buy, improve sell” strategy with a five-year plan - said discipline through removing overly centralised and bureaucratic management was required to improve GKN’s performance.

However, Melrose’s plans have met resistance. The Business Energy and Industrial Strategy select committee has raised questions about the national security implications of a takeover because of GKN's work on top secret military aerospace projects, something echoed by US politicians. MPs on the committee have also asked the Business Secretary to consider intervening because the prospect of Melrose winning control and then selling off parts of the business could damage the nascent industrial strategy.

Unions worried about the potential for Melrose closing factories to cut costs have echoed those concerns, while some customers have privately admitted to concerns about whether Melrose understands the long-term nature of the aerospace and automobile industries and the bidders stated plan plan to dispose or float the GKN businesses in five years is too short a timeframe.

Melrose dismissed GKN's plans as "long on adjectives and promises but desperately short on detail", adding that it was a "stark admission of management failure'.

Saying Project Boost "falls well short" of what Melrose is proposing, a spokesman for the bidder added: “Today’s ‘killer fact’ is that GKN is waving the prospect of a £2.5bn cash return ‘over the next three years’ funded mostly by a sale of Powder Metallurgy."

 Melrose said news of its bid had added £1.3bn to GKN's value as the share price rose and its plans would add another £1.4bn on the first day it took over if investors backed the deal, as well as hold on to the powder metallurgy business to derive more value out of it.

Sandy Morris, analyst at Jefferies, said GKN’s plan did not contain “many surprises; we have got roughly what we expected, and that’s no bad thing”.

However, he doubted it was a knock-out blow to Melrose, adding: “Outlining Project Boost likely will not end the debate about who would better execute it or a namesake – likely similar in objectives. The interesting thing is that Project Boost fulfils our expectations in that GKN’s problems appear to be of the scale and nature that we had sensed, not insurmountable.”