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GKN receives sweetened offer from Dana as deadline for Melrose takeover bid looms

Last updated: 09:41 26 Mar 2018 BST, First published: 07:41 26 Mar 2018 BST

GKN
GKN will become a pure play aerospace company under its plans

GKN PLC (LON:GKN) has received a sweetened offer from Dana Inc (NYSE:DAN) for its automotive division just days before the acceptance deadline on a hostile takeover bid from Melrose Industries PLC (LON:MRO).

Dana has increased its bid for the GKN Driveline business by US$140mln in cash, taking the total amount shareholders would receive to US$1.77bn after deducting US$1bn for the transfer of GKN’s pension deficit to the combined group.

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

GKN shareholders will own 47.25% of the merged company listed on both the New York Stock Exchange and the London Stock Exchange.

The engineer said it intends to return up to £700mln of cash to shareholders as soon as possible following the completion of the merger. It is expected to be the first instalment of up the £2.5bn cash return programme previously announced.

GKN touts benefits of Dana deal

GKN said the deal with Dana, combined with its so-called Project Boost strategy, will create US$235mln in cost synergies.

Under GKN’s strategy, it also plans to sell non-core divisions, including Powder Metallurgy, to become a standalone aerospace company.

“We are confident that, following the Dana transaction and the non-core disposals, GKN will become a pure play aerospace company with a strong balance sheet, our pension challenges behind us and a clear plan for delivering leading margin performance,” said GKN chairman Mike Turner.

The increased bid from Dana comes before Thursday’s deadline for shareholders to vote on whether to back GKN’s plan or a £8.1bn takeover approach from Melrose.

Turner said it believes the true value of GKN is more than £5 per share and the Melrose’s offer “fundamentally undervalues” the company. Melrose’s final offer values GKN at £4.62 per share.

GKN also argued that the proposed combination with Dana will help address the challenges and opportunities created by the transition to electric and hybrid vehicles. 

GKN retracts claims of shareholder support

In a separate announcement on Monday, GKN retracted statements made by top executives at the weekend suggesting the company has backing from shareholders for its plan. 

Chief executive Anne Stevens told The Sunday Telegraph that she was “convinced investors will back GKN”.

Group finance director, Jos Sclater, told The Sunday Times that "long-only shareholders are mostly supportive of existing management, and understand that the Dana deal and becoming a pure play aerospace company has, longer term, significantly more value than the Melrose bid".

However, GKN has now said: “These statements of shareholder support in respect of GKN were not verified and are hereby retracted.”

On Friday, activist investor Elliott Advisors said it will back the takeover bid from Melrose and urged other shareholders to accept the deal. 

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

Elliott, which has a 3.4% stake in GKN, said it was “sceptical of the company’s ability to deliver on Project Boost for its aerospace business", in a letter to the company's board.

Numis recommends GKN shareholders back Melrose offer

Brokerage Numis said while it thinks a combination of Dana and GKN Driveline would be “highly complementary”, it believes the deal undervalues the business. The analyst recommended GKN shareholders back the Melrose proposal.

“The issue we have is that the business is being sold too cheaply and too early,” Numis said, adding that it carries a “significantly lower” multiple than recent industry transactions with “insufficient value” attached to the eDrive unit.

“Industry multiples are 8.9x EBITDA (underlying earnings) with the latest Fortive/Altra deal at 13x, GKN quote an Enterprise value/EBITDA of 7.5x on the deal, but this is actually around 7.1x after adjusting for the losses at eDrive.

“Indeed, it would appear that the eDrive business (£36mln invested in 2017, order book of £2bn expecting sales of £500mln by 2022) is being given away for free or even detracting from the valuation."

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