Melrose’s 'Project Golf' bid for GKN beats engineer’s 'Damson' defence

By Ben Martin

LONDON (Reuters) - The opening salvo in what would become a three-month battle for British engineer GKN (GKN.L) was fired by Melrose's (MRON.L) chief executive over the telephone.

On Friday January 5, Simon Peckham rang GKN's advisers at JP Morgan to arrange a meeting with the FTSE 100-listed aerospace and automotive parts supplier.

The gathering took place the following Monday at the investment bank's offices next to the River Thames at Blackfriars in London, according to a source.

It was there that Peckham and Melrose executive chairman Christopher Miller made their first takeover proposal to Anne Stevens, the 69-year-old former Ford executive who was interim CEO of GKN, and the engineer's chairman, Mike Turner.

The cash-and-shares bid valued the engineering company at 7.4 billion pounds and was dubbed "Project Golf" internally by UK-based industrial turnaround specialist Melrose and its advisers.

The codename was a reference to the model of car manufactured by Volkswagen, which is one of GKN's biggest customers, a person with knowledge of the matter told Reuters.

The meeting between the four executives lasted for an hour at most, sources familiar with the situation said.

It marked the only time in the fierce battle that followed that executives from Melrose and GKN would speak to each other, in what quickly escalated into Britain's biggest hostile bid since Kraft pounced on confectionery giant Cadbury in 2009.

The initial bid was swiftly rejected by GKN, which made the approach public on January 12, when it also appointed Stevens permanently as CEO and disclosed it was examining an alternative plan to demerge its main aerospace and automotive divisions.

At the time, GKN dismissed the Melrose offer as being "entirely opportunistic" and "fundamentally" undervaluing the engineer.

WAR OF WORDS

That set the tone for an acrimonious war of words between the two companies that lasted right up until the takeover battle's denouement this week, when Melrose, which is also London-listed, finally clinched a takeover.

To win the fight, Melrose had to offer a better deal to shareholders than a rival tie-up with U.S. firm Dana (DAN.N) that GKN struck earlier this month. The Dana transaction was codenamed "Project Damson", after a type of plum tree, by Stevens and her team, according to a source.

It was a narrow victory for Melrose, which had set a deadline of 1200 GMT on Thursday for GKN investors to back its offer.

When the deadline expired, Melrose had received acceptances from 52.4 percent of GKN shareholders. That just exceeded the acceptance threshold of 50 percent plus one share that Melrose had set.

Indeed, the fight between the two companies had become so finely balanced in its latter stages that even an adviser to Melrose conceded to Reuters earlier this week that he was anxious about the outcome.

"I'm confident but it would be wrong of me to say I'm not nervous," said the adviser, who declined to be named.

The Melrose team, which included bankers from Rothschild, RBC Europe and Investec, endured not just months of criticism from GKN but scrutiny from British lawmakers, a U.S. congressman, regulators, the Unite trade union, GKN shareholders and Airbus (AIR.PA), which is the engineer's largest customer.

The political attention was driven by GKN's participation in U.S. and British defence programmes and worries about the status of its 6,000 British employees and their pensions following a Melrose takeover.

This is because the turnaround specialist sells companies once it improves their performance, a strategy that fuelled concerns about jobs and the possibility an overseas buyer could acquire GKN's sensitive aerospace business.

Since listing on London's junior Aim market 15 years ago with net cash of just 12.7 million pounds, Melrose has grown into a business with a market value of more than 4 billion pounds.

It typically owns the firms it buys for three to five years. GKN is its biggest deal yet.

The aerospace and automotive components business is considered a mainstay of Britain's engineering sector, tracing its roots back more than 250 years to an ironworks in South Wales. During the Second World War, its Hadley Castle site in Shropshire produced Spitfire fighters that won the Battle of Britain.

Today, GKN employs more than 58,000 staff around the world and supplies parts for vehicles and aircraft including the Porsche 918 Spyder supercar, the Blackhawk military helicopter and the Eurofighter Typhoon.

DANA APPROACH

Two profit warnings in October and November caused by problems at GKN's North American aerospace business, which sent its shares tumbling and prompted the departure of the executive originally selected to be its next CEO, gave Melrose the opening to launch its bid.

However, Melrose was not the only company to seize on the opportunity.

Late last year, U.S. axles and driveshafts maker Dana also privately approached GKN.

The British company and its advisers, which included Gleacher Shacklock, JP Morgan and UBS, started behind-the-scenes talks with the Ohio-based business early this year.

The resulting agreement between GKN and Dana would form the centrepiece of the engineer's defence against Melrose.

Having already disclosed plans to split itself up, on March 9 GKN announced a cash-and-shares deal to merge its automotive business with Dana.

Along with a pledge to find a buyer for its powder metallurgy business and return as much as 2.5 billion pounds in cash to shareholders, this would leave GKN purely focussed on its aerospace business.

Melrose quickly responded on March 12 by raising its offer to 1.69 new shares and 81 pence in cash per GKN share and declaring it bid “final”.

This gave GKN investors a choice: accept a deal that handed them 60 percent of Melrose and valued GKN at about 8 billion pounds, or back the engineer's management and take a 47.25 percent stake in Dana, which pledged to take a listing in London alongside its New York listing.

In the end, a slim majority supported Melrose.

"There's a lot of disappointed people at GKN at the moment," an adviser to the engineer said on Thursday evening.

(Reporting by Ben Martin; Editing by Adrian Croft)