Melrose Industries PLC (LON:MRO) on Tuesday picked holes in full year results from GKN PLC (LON:GKN) in an effort to convince shareholders to vote in favour of its proposed hostile takeover of the engineer.
GKN rejected a £7.4bn offer from Melrose in January, prompting the turnaround specialist to turn hostile and take its bid directly to shareholders.
Following GKN's annual results on Tuesday, Melrose pointed to falling margins, weak profit growth and higher-than-expected debt.
"Today's statements are full of long-term promises and more short-term actual misses," said Melrose chairman Christopher Miller.
GKN full year results
GKN posted a pre-tax profit of £658mln for the year ended December 31, up from £292mln a year ago, boosted by favourable exchange rates.
But adjusted pre-tax profit, excluding the benefits of derivatives and other financial instruments, fell to £572mln from £678mln due to writedowns at its North American aerospace business.
Writedowns in US aerospace also hurt the trading margin, which fell 180 basis points to 6.4%. Excluding the writedowns, trading margins still dropped to 7.4% from 8.2%.
“Significant write-downs in the US aerospace business have hit profits and margins. Even excluding those, margins are heading in the wrong direction," said Nicolas Hyett, equity analyst at Hargreaves Lansdown.
"It’s these problems, and scope for improvement, that attracted serial acquirer Melrose in the first place."
Nevertheless, revenue increased 10% to £9.67bn with sales growth across the automotive, aerospace and power metallurgy businesses.
North America struggles
However, the aerospace division saw headline trading profit plunge 48% to £175bn, due to the impact of North American balance sheet review adjustments.
GKN said the biggest drag on aerospace profits was US Standard Aerostructures, which posted a trading loss for the year due to falling legacy programmes, price pressures, the end of a development contract and operational issues.
The group ended the period with net debt of £889mln, compared to £704mln in 2016, but raised its 2017 dividend to 6.2p from 5.9p the previous year and reiterated plans to return up to £2.5bn to shareholders over the next three years.
READ: GKN plans to return £2.5bn to shareholders in three years as it continues takeover fight
The company also said it would push ahead with plans to split GKN Aerospace and GKN Driveline into two listed companies by mid-2019.
Project Boost
GKN's decision to demerge the two divisions comes as it tries to persuade shareholders to vote against the Melrose bid and support its own turnaround strategy.
The turnaround plan, named 'Project Boost', is expected to deliver a £160mln recurring annual cash benefit from the end of 2020, GKN said.
READ: GKN takes another swipe at Melrose as it warns takeover would weaken pension scheme
But Melrose said the "rushed plan" to demerge aerospace and automotive "begs the question of whether the priority of Project Boost has been superseded by the dismemberment of GKN in the next 15 months".
"At the heart of this is a plea for the incumbent team to embark on an unproven and risky plan which we believe is wrong for all GKN stakeholders and UK plc as a whole," Miller said.
"GKN deserves better than this: we believe Melrose is the only team with the ability to unlock its true potential."
GKN tries to convince shareholders of turnaround plan
Chief executive Anne Stevens argued that GKN has "fantastic businesses which have grown organically above our key markets, demonstrating once again our strong positions and leading technology".
“However as I set out two weeks ago, we now need to change our emphasis and ensure that those orders deliver world-class financial performance with a renewed focus on strong margins and cash generation," she said.
"With Project Boost, I have laid out how we plan to achieve this, through detailed product segment strategies and an emphasis on manufacturing and functional excellence."
Shares were little changed at 430p in afternoon trade.
Hargreaves analyst Hyett said Stevens is doing her best to convince shareholders that she, not Melrose, is best placed to deliver improvements.
"Her turnaround plan is comprehensive, and flesh is being added to the bones on a weekly basis, but it still might not be enough to convince investors," the analyst said.
"Driveline in particular will require additional investment in the years to come, and GKN has a history of over-promising and under-delivering on profitability."