Melrose is splitting itself in two in a move that completes the break-up of one of Britain’s oldest businesses and plans to aggressively target takeover deals in a bid to boost a lacklustre share price.
It will also give the car business equity it can use to do deals. It will be listed on the London Stock Exchange under a new, as yet un-decided name.
That’s a boost to the bankers that will do the deal and the wider market, which has lately been starved of fresh flotations.
Liam Butterworth, the GKN boss, will head the demerged business. GKN can trace its history back to the late 1700s. It was bought by Melrose for £8 billion in 2018 in a somewhat controversial deal that attracted close government scrutiny.
CEO Simon Peckham admits that some in the City think that at the moment each business is holding the other one back.
“This is about Melrose getting its mojo back,” he told the Standard.
The stock is down 40% in the last five years, today falling 2.5p to 135p, leaving the business valued at £5.5 billion.
Brokers at Investec reckon post demerger, each business could be worth around £5 billion, in which case both would sit comfortably in the FTSE 100.
Melrose, a turnaround specialist that has won praise for its bold approach, employs 40,000 people worldwide, 4000 of them in the UK.
The car and the jet business are exposed to soaring fuel costs, but have mostly managed to pass on those extra bills to customers, so far.
Chip-shortages and supply chain problems persist, although Melrose predicts that Auto can double profits and Aero triple them once demand returns.
The demand for electric car engines should help GKN in particular, Peckham believes.
Half year results out today show that revenues rose by £200 million to £3.9 billion. There was a loss of £358 million, largely a Covid-related matter.
Justin Dowley, chairman of Melrose Industries, said: “Since acquiring GKN in 2018 we have reinvigorated each business to achieve its potential.”
Shareholders will have to approve the deal, which should go ahead in the middle of next year.
Investec says the demerger is better for shareholders than a sale. It said in a note: “While restructuring of the auto businesses in order to hit margin targets should complete this year, an offer for a disposal today would unlikely recognise full value given current macro conditions. A demerger next year therefore allows investors to benefit from the separate profit recovery remaining and for Melrose to buy, either in Aerospace or a third leg.”