GKN receives several approaches for automotive business

January 26, 2018

GKN, the FTSE aerospace and automotive components groupfacing a hostile £7bn bid from Melrose Industries, has had several approaches for individual businesses, people with knowledge of the situation have said.

One top-20 investor who met management when the Melrose bid was launched said he understood there had been 10 to 15 approaches for GKN’s automotive business since the board announced plans to split the company’s divisions into separate entities in response.

This division has invested heavily in electric driveline systems, known as eDrive, to tap into the growing market for hybrid electric cars. “It is very clear there are a large number of companies going after the eDrive business,” the investor said. “This will be a massive growth business over the next 15 years. Suppliers are spending lots of money on research and development and it might make sense for some to work together.”

GKN’s automotive business, which, with the powder metallurgy unit, accounts for some 60 per cent of group sales, supplies parts and systems for roughly half the world’s passenger cars and light trucks. The company last week revealed that it expected its eDrive business to deliver significantly higher than expected revenues on the back of several contract wins since August. It pledged that sales would increase from £33m this year to £500m by 2022.

“There have been various inbound approaches . . . for various businesses,” said another person with knowledge of the situation.

GKN declined to comment.

A third person close to the situation said the board would consider the sale of a single division if the numbers added up to more than the Melrose offer. “The board would consider that very seriously,” the person said. “It would consider any value for money offer, wherever Melrose ends up.”

Those rumoured to be interested include China’s SAIC and ZF Friedrichshafen of Germany. The board would not welcome a sale to a private equity firm, the person added.

However, no sale would be quick as shareholder approval would be needed, analysts said.

Melrose said: We have said from the start that a knee-jerk sale to a third party — foreign or domestic — would not be the best solution for the businesses themselves or for shareholders. Melrose is about transforming businesses and we believe that is what is needed here.”

News that there is interest in GKN’s divisions comes as the group seeks to convince shareholders that it is on course to reverse the underperformance of recent years.

Anne Stevens, the group’s new chief executive, who was hastily appointed in the face of the Melrose assault, has sought to win support with details of a transformation plan which, as well as the split, includes disposals of non-core businesses and a greater focus on the performance of individual business units.

Shareholders have been broadly positive about both the plan and Ms Stevens, and have voiced dissatisfaction with the level of the Melrose offer — which would limit them to 57 per cent of the upside based on the offer of 1.49 Melrose shares and 81p in cash for every GKN share. Should Melrose increase its offer, it is expected to tweak the equity portion rather than the cash element to allow GKN shareholders to benefit from any turnround.

Both parties have got a broadly similar plan so the question is who has got the best credibility in terms of execution

However, the credibility gap with the management team at Melrose — which is well known to City investors — remained. “While Anne Stevens may have credibility,” said one leading investor, “the rest of the management don’t. They have had years to do this.”

A second top 20 investor said: “Both parties have got a broadly similar plan so the question is who has got the best credibility in terms of execution. Ms Stevens is good but she is just one person. It will take time to change the culture and Melrose are specialists in this. If you are trying to kick-start culture change, having a kick start at the top is helpful.”

Another top 20 investor said everything now rested on GKN’s defence document which would provide more detail on how cash generation and margins could be improved. GKN will have two weeks after Melrose releases its offer document, expected from about February 1.

Based on a meeting with GKN’s management, the shareholder said he believed that the group’s defence would reveal there was more value embedded in the company than many realised, as in for example the electric driveline and powder metallurgy businesses. These were currently lossmaking but “exciting going forward”, he said. “The starting point may not look as bad as people think.”

A disposal of these businesses as part of the defence would be difficult but not impossible. “If they could crystallise the premium upside in auto now, they have got much better chance of persuading shareholders that the credibility gap is smaller,” he added.

“Does that close the credibility gap completely? Probably not. But it would make people value the asset more attractively and, anyway, it either means Melrose has to pay more or GKN shareholders have to think more about what they have got.”

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