The turnaround specialist has taken its bid hostile and hopes to win over GKN shareholders.
Melrose left at 'overweight'
Barclays remains bullish on Melrose, repeating an ‘overweight’ rating and target price of 240p.
“We have been waiting for Melrose to find its next acquisition and we believe the potential to improve GKN is high; even if the proposed bid for GKN does not go ahead, it illustrates the scale of management’s ambitions, and we expect Melrose to find a suitable alternative in time,” Barclays said.
However, key concerns about the deal include GKN’s pension scheme and business cycles in aerospace and automotive.
GKN's pension 'manageable'
GKN has said the proposed takeover would weaken its pension scheme but Melrose has said it has a track record of safeguarding and improving pensioners’ rights in every acquisition it has made.
“We update our analysis of the GKN’s pension scheme and believe that situation looks quite manageable and Melrose’s assumptions appear conservative,” said Barclays.
“Given Melrose’s potential period of ownership, we believe it is difficult to second guess the possible impact of business cycles on its ownership of assets.”
Barclays said absent of some potential near-term risks, it continues to see long-term value in Melrose’s shares regardless of its bid for GKN.
The bank believes Melrose can achieve a 2.0x equity return and 340p share price based on the current formal offer terms if it delivers a 360 basis points operating margin improvement to 11.3%.
Share in Melrose rose 1.2% to 217p in late morning trade.