Proactive Investors - Run By Investors For Investors

Melrose-GKN takeover would create further value for shareholders, says Barclays

Barclays remains bullish on Melrose, repeating an ‘overweight’ rating and target price of 240p
Business cycles in GKN's aerospace and automotive divisions are a key concern

Melrose Industries PLC’s (LON:MRO) should generate further value for shareholders if it is successful in its takeover bid for GKN PLC (LON:GKN), according to Barclays Capital.

GKN last month advised shareholders to vote against a £7.4bn offer from Melrose, saying it "fundamentally undervalued" the firm.

The turnaround specialist has taken its bid hostile and hopes to win over GKN shareholders.

READ: GKN lifts sales forecast for electric car unit as it fights off Melrose hostile takeover

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.

READ: GKN takes another swipe at Melrose as it warns takeover would weaken pension scheme

“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. 

View full MRO profile View Profile

Melrose Timeline

Related Articles

November 15 2017
Record Q1 earnings, recent financing bring Atlas the financial heft to make multiple acquisitions

No investment advice

The Company is a publisher. You understand and agree that no content published on the Site constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable or advisable for any specific person. You further understand that none of the information providers or their affiliates will advise you personally concerning the nature, potential, advisability, value or suitability of any particular security, portfolio of securities, transaction, investment strategy, or other matter.

You understand that the Site may contain opinions from time to time with regard to securities mentioned in other products, including company related products, and that those opinions may be different from those obtained by using another product related to the Company. You understand and agree that contributors may write about securities in which they or their firms have a position, and that they may trade such securities for their own account. In cases where the position is held at the time of publication and such position is known to the Company, appropriate disclosure is made. However, you understand and agree that at the time of any transaction that you make, one or more contributors may have a position in the securities written about. You understand that price and other data is supplied by sources believed to be reliable, that the calculations herein are made using such data, and that neither such data nor such calculations are guaranteed by these sources, the Company, the information providers or any other person or entity, and may not be complete or accurate.

From time to time, reference may be made in our marketing materials to prior articles and opinions we have published. These references may be selective, may reference only a portion of an article or recommendation, and are likely not to be current. As markets change continuously, previously published information and data may not be current and should not be relied upon.

© Proactive Investors 2018

Proactive Investor UK Limited, trading as “Proactiveinvestors United Kingdom”, is Authorised and regulated by the Financial Conduct Authority.
Registered in England with Company Registration number 05639690. Group VAT registration number 872070825 FCA Registration number 559082. You can contact us here.

Market Indices, Commodities and Regulatory News Headlines copyright © Morningstar. Data delayed 15 minutes unless otherwise indicated. Terms of use