Melrose Industries PLC (LON:MRO), which bought GKN in a £8bn hostile takeover this year, is reportedly considering whether to shelve the sale of the engineer’s powder metallurgy unit after receiving a string of “low-ball” offers.
According to Sky News, last week Melrose received initial bids for GKN Powder Metallurgy that value the business at about £1.6bn, below analysts’ expectations of £2.0bn.
READ: Melrose lifted as it reports strong revenue growth in Aerospace and Powder Metallurgy
Shares fell 5.5% to 171.70p in morning trading.
Sky said Apollo and PAI Partners were among the private equity firms that approached Melrose with offers last week.
The lower-than-expected bids have raised the prospect that Melrose may halt a planned immediate auction of the division.
"They will sell the business, but it may not be through this particular auction," a person close to Melrose told Sky.
Melrose had said at the time of its acquisition of GKN that it was “exploring strategic options” for the powder metallurgy arm as it wanted to focus on the aerospace and automotive divisions in the longer term.
Jefferies and Rothschild are advising on the sale of the division, which makes high-performance components for automotive and industrial applications.
RBC Capital thinks £1.8bn offer 'acceptable'
Analysts at RBC Capital said: “Melrose management is strict on asset valuation and is unlikely to sell if current slightly more uncertain market conditions have weighed on bids for Powder Met.
“However, at this point, this is not a management-confirmed story, and we believe that if bids of £1.8bn+ were to be received that would be acceptable (vs £2bn in analyst forecasts referenced by the Sky News article). Our SOTP assumes a £1.8bn valuation. We would note that the £0.2bn differential versus our SOTP is only circa 2% on group valuation.”
RBC said the focus of the GKN deal remains on significant business improvement over the next three to five years. The broker sees improvement opportunities across the group, including at Powder Met where it expects margins to rise by 300 basis points through to 2022.
Melrose’s hostile takeover of GKN was approved by shareholders in March.
READ: Melrose declares narrow victory in bitter battle to takeover GKN with acceptances of 52.43%
The turnaround specialist agreed to a number of pledges for its acquisition of GKN to soothe concerns raised by business secretary Greg Clark about the future of the engineer.
The commitments included not selling the aerospace division for five years, maintaining the GKN’s London listing, keeping the UK headquarters and ensuring research and development spending was at least 2.2% of sales.