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Activist investor Elliott Advisors backs Melrose's hostile takeover bid for GKN

Published: 15:23 23 Mar 2018 GMT

aerospace
The acceptance deadline for the Melrose offer is March 29

Elliott Advisors, an activist investor with a 3.4% stake in GKN PLC (LON:GKN), has said it will back a hostile takeover offer for the engineer from turnaround specialist Melrose Industries PLC (LON:MRO).

The investor also urged fellow shareholders to accept the deal, which values GKN at £8.1bn.

Shareholders have until March 29 to vote on whether they will support the Melrose bid or GKN’s US$6.1bn deal to sell its automotive division to Dana Incorporated (NYSE:DAN).

Under GKN’s so-called 'Project Boost' strategy, the company will become a standalone aerospace business by selling off non-core branches, including power metallurgy.

Elliot 'sceptical' on GKN strategy

In a letter to GKN’s board, Elliot said it was “sceptical of the company’s ability to deliver on Project Boost for its aerospace business".

"GKN’s track-record at improving its operating margins has been unimpressive, yet your team nevertheless claims that it can deliver on its most ambitious plan ever, and that a few potentially qualified individuals can extract the company from its torpor to deliver over a 35% increase in profitability – an achievement unheard of in GKN’s recent history," the hedge fund wrote.

"Our belief is that this would require management’s full attention to implement profound cultural and structural shifts throughout the business, while at the same time both getting the driveline disposal over the finish line and running an efficient full-blown auction process for the powder metallurgy business."

Outcome of takeover battle too close to call, says Deutsche Bank

Deutsche Bank said it sees the outcome of the shareholder vote “too close to call”.

So far 9% of institutional investors having publically backed GKN management, while 7% have supported Melrose’s bid.

“Should Melrose’s offer be successful we would not be surprised to see the level of acceptance only moderately above the  50% plus one share threshold,” the bank said.  

Ahead of the deal deadline, the companies have tried to reassure shareholders on GKN’s pension schemes.

READ: Melrose reaches deal with GKN's pension scheme trustees as takeover battle continues

On Thursday, Melrose said it has reached an agreement with the trustees GKN pension scheme with a proposed contribution of up to £1bn if its takeover goes ahead.

GKN has agreed to contribute £625mln into its UK pension schemes and Dana will put in a further £124mln, implying a total contribution of £749mln.

The engineer has also promised to halve its pension liabilities, eliminate its pension deficit and “substantially reduce” the future volatility of remaining schemes.

Politicians and GKN client Airbus opposed to Melrose deal

“However, politicians seem to be opposed to the deal (or at least the most vocal ones are) and a key customer, Airbus, has stated it wants certainty on the long-term ownership of GKN if it is to commit to long-term aerospace contracts,” said Russ Mould, investment director at AJ Bell.

He added: “With Melrose at 223p and GKN at 429p at the time of writing, GKN is trading at a 6% discount to the Melrose offer price, which equates to 457.9p at those prices to suggest GKN may just be getting the better of the argument.”

Last week Airbus said a Melrose takeover would make it "practically impossible" to keep working with GKN on the concern that it would lead to a reduction in the budget for engineer's research and development budget. Airbus is GKN's biggest customer.

READ: GKN could stop getting business from Airbus if Melrose takeover goes ahead

In reaction to the Airbus comments, Melrose’s chairman, Christopher Miller said the company invests in its businesses "for the long-term" and attacked GKN's "hasty" break up plan.

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