GKN rival bid prospects hampered by distinct divisions, demerger trend – bankers
24 JAN 2018
- Third parties have registered interest following Melrose approach
- Neither Melrose nor GKN seen splitting business in hurry
- Post deal break-up may have tax implications for buyers
The prospect of a counter offer for GKN [LON:GKN] is hindered by a lack of buyers for the whole group, although there may be parties interested in its aerospace and auto businesses separately, according to three sector bankers.
The aerospace and automotive group’s board has this month repeatedly spurned an unsolicited approach from turnaround specialist Melrose [LON:MRO].
A number of different parties have made contact with GKN to register their interest, in light of Melrose’s approach, a source close to the situation said. The source did not specify whether any of these parties was interested in GKN as a whole, but the company has not confirmed that it is in talks with any third parties or has received any further approaches following Melrose's unsolicited approach.
The trend in the industry has been toward de-conglomerating and there are not many companies that would want GKN’s mix of aero and auto businesses, said two of the bankers.
Many industrial conglomerates are in the process of, or have concluded, restructuring and spinning off non-complementary divisions, including General Electric Co [NYSE:GE], Siemens [ETR:SIE], Autoliv [STO:ALIV-SDB] and Delphi [NYSE:DLPH].
GKN has been considering a break up for years, but it would be very complicated to split the group, particularly in light of the pension deficit, according to the first banker. The company is likely to have concluded that it would not have remained independent for very long following any split, he added. If the aerospace division was sold, then GKN would be where it was 10 years ago - a pure play automotive business.
The pension liability is a big uncertainty and increases deal risk for potential buyers, a second banker agreed. In a statement, the pension trustees highlighted the aggregate deficit on a gilts flat basis of GBP 1.1bn, or GBP 1.9bn on an aggregated deficit on a solvency (or s75) basis.
GKN is looking to push ahead with its own plans to separate the company’s two main divisions – aerospace and automotive. The Redditch, UK based group refuted Melrose’s claim that it was seeking a “hasty break-up”, however, stating that the timing of a separation would be determined by the most cost effective scenario.
But, neither GKN nor Melrose are likely to split up the aero and auto divisions in a hurry, said the second sector banker.
If such a split were to happen, buyers may emerge for GKN’s businesses, the first and second sector banker said. ZF Friedrichshafen AG and BorgWarner Inc [NYSE:BWA] are potential buyers for GKN’s automotive division, the first sector banker said.
GKN has been considering a break up for years, but it would be very complicated to split the group, particularly in light of the pension deficit, according to the first banker. The company is likely to have concluded that it would not have remained independent for very long following any split, he added. If the aerospace division was sold, then GKN would be where it was 10 years ago - a pure play automotive business.
The pension liability is a big uncertainty and increases deal risk for potential buyers, a second banker agreed. In a statement, the pension trustees highlighted the aggregate deficit on a gilts flat basis of GBP 1.1bn, or GBP 1.9bn on an aggregated deficit on a solvency (or s75) basis.
GKN is looking to push ahead with its own plans to separate the company’s two main divisions – aerospace and automotive. The Redditch, UK based group refuted Melrose’s claim that it was seeking a “hasty break-up”, however, stating that the timing of a separation would be determined by the most cost effective scenario.
But, neither GKN nor Melrose are likely to split up the aero and auto divisions in a hurry, said the second sector banker.
If such a split were to happen, buyers may emerge for GKN’s businesses, the first and second sector banker said. ZF Friedrichshafen AG and BorgWarner Inc [NYSE:BWA] are potential buyers for GKN’s automotive division, the first sector banker said.
Spirit Aerosystems [NYSE:SPR] is a potential acquirer of the aerospace division, the three bankers said, with the third also naming United Technologies Corp [NYSE:UTX] as a potential buyer.
Melrose would have limited scope to compete with a rival strategic buyer should one emerge, due to its disciplined investment approach, noted the first banker.
Private equity group Carlyle is also rumoured to be interested, according to news reports. Onex is another potential PE buyer, added a fourth banker.
A future separation of GKN by potential buyers would have tax implications and would partly determine the price buyers are willing to pay, noted the first sector banker.
Buyer Commitment
GKN has been on Melrose’s radar for 15 years, according to a person familiar with the turnaround group.
Melrose has said it plans on selling GKN’s powder metallurgy business once it has been improved. Given that Melrose is not using a leveraged financial structure, the company will wait until it turns around the metalluargy business to drive a higher valuation in a sale, the second banker elaborated.
Melrsoe has a great track record of tidying up businesses like GKN, this banker said, adding that its bid was a typical case of Melrose opportunism.
Melrose monitors all UK -isted industrial companies, paying particular attention to those that have made missteps, the first sector banker said.
GKN issued a profit warning in October, citing pricing pressure and challenges in its aerospace division, and followed up that a month later by ousting its nominee for chief executive even before he had taken up the job.
On 17 January, GKN’s newly appointed CEO Anne Stevens said in a statement that the company was “actively engaging shareholders to explain how our transformation plan will provide value.”
But a shareholder who met the company last week said that little detail had been provided on the execution of that plan.
Alongside the appointment of Stevens as permanent CEO and news of its plans to separate the two main divisions, GKN also announced in recent days a two-year transformation programme to improved cash and profit.
GKN and Melrose declined to comment
Private equity group Carlyle is also rumoured to be interested, according to news reports. Onex is another potential PE buyer, added a fourth banker.
A future separation of GKN by potential buyers would have tax implications and would partly determine the price buyers are willing to pay, noted the first sector banker.
Buyer Commitment
GKN has been on Melrose’s radar for 15 years, according to a person familiar with the turnaround group.
Melrose has said it plans on selling GKN’s powder metallurgy business once it has been improved. Given that Melrose is not using a leveraged financial structure, the company will wait until it turns around the metalluargy business to drive a higher valuation in a sale, the second banker elaborated.
Melrsoe has a great track record of tidying up businesses like GKN, this banker said, adding that its bid was a typical case of Melrose opportunism.
Melrose monitors all UK -isted industrial companies, paying particular attention to those that have made missteps, the first sector banker said.
GKN issued a profit warning in October, citing pricing pressure and challenges in its aerospace division, and followed up that a month later by ousting its nominee for chief executive even before he had taken up the job.
On 17 January, GKN’s newly appointed CEO Anne Stevens said in a statement that the company was “actively engaging shareholders to explain how our transformation plan will provide value.”
But a shareholder who met the company last week said that little detail had been provided on the execution of that plan.
Alongside the appointment of Stevens as permanent CEO and news of its plans to separate the two main divisions, GKN also announced in recent days a two-year transformation programme to improved cash and profit.
GKN and Melrose declined to comment