“Buy, Improve, Sell” is the Melrose Industries PLC (LSE:MRO, OTC:MLSPF)’s motto but is the ‘turnaround’ business merely an asset stripper looking for a short-term buck?
The firm today completed the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses into a new company, Dowlais Group PLC (LSE:DWL).
Melrose named the spin-off after an ironworks built in 1759 from which the former GKN engineering group originated but was it a romantic nod to the past or a cynical attempt to remove GKN from the history books.
The question arises because of the controversy that surrounded the £8.1bn takeover of GKN in 2018.
Protests from government, unions and GKN customers failed to stop Melrose claiming victory but the only winners seemed to be City advisers, bankers, PR firms and lawyers from both sides with fees thought to have racked up to more than £200mln.
At the time, Tory MP Robert Halfon described Melrose as “robber baron capitalism at its worst – many British jobs being destroyed by the few, corporate vultures plundering a company for short-term profits but long-term disaster”.
He may have a point. Melrose has spent the intervening period since completing the deal restructuring the business and reckons it is in a better shape to benefit from a recovery.
But 4,000 jobs have been cut (13% of the 2019 total) and 12 manufacturing sites closed.
More than £100mln has been shaved from selling, distribution and administrative costs and an overhaul of procurement has knocked almost £80mln off its materials bill, according to the Dowlais prospectus.
Of course, inefficiencies need to be ironed out and the good times can’t always roll but the issue with companies such as Melrose is they always take the short-term view.
The do exactly what they say on the tin. Buy, “improve”, cut costs, sell.
But is this a way to run any business and does it create value?
Critics suggest the only winners from this approach are Melrose bosses and the lawyers and accountants whose hourly charges quickly tick higher.
And don’t be fooled by the apparent 144% share price jump today. A mere reflection of a three for one share consolidation as part of the spin-off.
Bloomberg reported Dowlais shares fell as much as 28% while Melrose is around 19% lower after the consolidation.
GKN Aerospace will remain under the Melrose umbrella for now but as GKN light, sorry Dowlais, starts trading after all the lofty promises, the acrimony, wasted cash and job losses was it really worth it.