Melrose in series of pledges ahead of GKN investor takeover vote

Melrose (LSE: 136541.L - news) , the company behind a hostile takeover bid for engineering firm GKN (Frankfurt: 694194 - news) , is facing Government demands for a series of commitments on the engineering group's future.

Ahead of a deadline of lunchtime on Thursday for a majority of GKN investors to accept Melrose's £8.1bn offer, it has been revealed Business Secretary Greg Clark has written to the turnaround specialist to outline several concerns.

Chief (Taiwan OTC: 3345.TWO - news) among them is a question mark about long-term investment and ownership - given GKN's standing, its work in UK defence and Melrose's usual operating model of restructuring and selling for a profit.

Mr Clark wrote: "I recognise that any listed company may be subject to future takeover and so cannot guarantee its ownership indefinitely.

"However, I am concerned that a short-term approach to ownership may not be compatible with maintaining the longer-term relationships which characterise the best interests of the defence field.

"In the light of this I would expect to see a commitment to continuity of ownership and strategic investment specific to the defence-related business of GKN and to exclude the option of a short-term sale of this business without the
consent of the Government.

"I am aware that you are separately discussing with the Ministry of Defence the terms of an agreement that would satisfy any concerns that the Defence Secretary may have."

Melrose responded with several "legally-binding" commitments covering the first five years of its ownership - commitments, which critics said, did not pass muster.

The pledges included keeping GKN's headquarters in the UK and the company listed in the country - as demanded by Mr Clark.

It also promised to maintain the rights of the GKN Aerospace and GKN Driveline businesses to use the GKN trademarks and that Melrose would maintain research and development spending at current levels.

Melrose added it was prepared to guarantee ownership of the aerospace division.

However, there was no mention of Mr Clark's demand for a commitment to maintain the UK workforce.

GKN chief executive Anne Stevens said: "The fact that Melrose appears to have been forced into these undertakings shows once again that it would be an unsuitable owner of GKN."

The company said it was further evidence that shareholders would be taking a risk in accepting the offer, adding that Melrose's statement left the GKN Driveline business facing uncertainty, and also raising questions over the funding of its commitments on pensions.

Rachel Reeves, the Labour MP who chairs the business select committee, said the commitments from Melrose were "quite limited and also quite short term".

She told Sky News she would like to see the Government have the power to intervene in a wider number of cases as already happened in other countries.

Paul Everitt, chief executive of industry body ADS, said: "In assessing the response from Melrose, it appears that the commitments made are relatively short term by comparison with the investment cycles associated with GKN's core business.

"They only address the period of direct Melrose ownership, which will only last until they receive a 'strategic' offer for or they float the aerospace business, and provide no guarantees on the priorities or nationality of future buyers.

"Our industry needs to see long-term investment and commitment from a strategically important business like GKN to give confidence to customers and suppliers in the UK and around the world."

GKN has responded to Melrose's takeover approach by agreeing a deal of its own to sell its Driveline auto division to US firm Dana - arguing its approach will offer shareholders better value over the long term.

While several high profile GKN customers and politicians have also expressed fears about Melrose as a potential owner, a move by Dana on Monday to increase, by £100m, the cash it was willing to pay was seen by analysts as a desperate move.

GKN was also forced to retract several statements made by executives which had claimed investor support for its approach.

In his response to Mr Clark, Melrose chief executive Simon Peckham said the company was "a great British success story" and "totally transparent about our ambitions and intentions".