Melrose Industries PLC (LON:MRO) is to meet with GKN PLC (LON:GKN) shareholders on Monday to convince them of the merits of its £7bn takeover bid.
GKN’s management turned down the 405p per share offer on Friday as it unveiled plans to split its aerospace and automotive businesses. The company concluded that the bid was “entirely opportunistic and that the terms fundamentally undervalue the company and its prospects.”
READ: GKN shares take-off as it reveals rejected takeover proposal, unveils plans to separate its businesses
Melrose, which specialises in buying and turning around manufacturing companies, intends to pursue its takeover proposal. It will present GKN shareholders with an argument that the company is "an overly complex and under-managed organisation without focus which needs a fundamental change of culture and leadership".
"They (GKN shareholders) can elect to sell in the market right now for a substantial premium to Friday's opening price - which itself has increased following a rise in the price of Melrose's shares," Melrose chief executive Simon Peckham said in a statement on Monday.
"Or they can choose to combine their business with ours and have the majority share in what we are confident will be a business capable of significant value enhancement."
Under the proposed takeover, Melrose intends to improve GKN’s businesses rather than implement what it calls a "hasty" break-up. Its investor presentation is available on the Melrose website, it said.
GKN continues to miss margin targets, Melrose argues
GKN’s decision to split the businesses follows a shock profit warning in October as a result of difficult trading in aerospace.
Melrose said GKN has a history of missed margin targets since 2011. Under its ownership, Melrose would aim to re-purpose GKN operations to exceed the company’s top-end group trading margin target of 10%, it argued.
Melrose said GKN’s consensus group trading margin for the full-year 2017 is 7.7%, unchanged from 2011, despite having spent about £3.2bn on capital expenditure and acquisitions between 2012 and 2016.
READ: GKN shares descend as it ousts incoming CEO and warns of further write-off to US aerospace arm
GKN's shares rose 3.1% to 433p while Melrose was little changed at 227.5p in morning trading.
Bid could go hostile, says analyst
Mike van Dulken, head of research at Accendo Markets, said it was likely Melrose could better its existing 21.7% premium offered on GKN's shares to Thursday's closing price and take things hostile to seek control.
"Firstly because an opening approach is rarely what is ultimately agreed to (and because 25%+ is normally required as a control premium)," he said.
"Secondly, the language employed by Melrose in a presentation now available on its website is highly critical, suggesting the target is “overly complex and under-managed organisation without focus which needs a fundamental change of culture and leadership."
He added that GKN's share price reaction "suggests it may be looking for the nod from major shareholders to either better the existing 21.7% premium offered (vs Thurs price) or take things hostile in order to seek control".
Numis cuts to 'hold'
Numis lowered its rating on GKN to 'hold' from 'buy' as it awaits an update from Melrose's pursuit.
"On the indicative terms, accepting an offer would, we estimate, translate to a 12.5% lower value longer term for GKN shareholders (sum-of-the-parts 546p against 624p) than self-help, the upside being dilution from existing Melrose equity," the broker said.
"However, a proven management team suggests lower execution risk and Melrose has a strong track record on disposals and garnering such premium."
Numis also noted that Melrose margin improvements have averaged 7% on its four deals, suggesting the company may be eyeing greater upside than the 250 basis point target of the current GKN management team.