TheChek News Flow

Turnaround specialist Melrose [LON:MRO] is not currently soliciting shareholder commitments in connection with its hostile bid for GKN [LON:GKN], according to a source familiar with the matter and a top target shareholder.

Both GKN and Melrose are lobbying shareholders. However, GKN is not seeking irrevocable undertakings either at this stage, the shareholder said, following a meeting with the company. Further shareholder outreach could come closer to the offer’s first closing date, he added.

GKN has repeatedly rebuffed Melrose's GBP 7.2bn hostile bid, which has a minimum acceptance condition of 90%. The first closing date for Melrose’s offer is 9 March, but the latest by which shareholders can accept the offer is 2 April.

Given the similarity of GKN and Melrose’s proposition, the transaction is now essentially hinged on which team is better at executing the (turnaround) plan, said the source familiar.

On 14 February, GKN said it plans to return GBP 2.5bn to shareholders, improve margins and pay out about half of its free cash flow in dividends over the next three years.

Moreover, GKN’s management seems confident in their ability to deliver on their plan, the shareholder said.

GKN’s pitch to shareholders was impressive, the investor conceded. The shareholder was yet to make a decision on which management team to back.

It is likely to be a close call, the shareholder said.

Melrose has also promised margin improvement. But a source familiar previously told this news service that Melrose could deliver higher shareholder returns. GKN shareholders could chalk up as much as GBP 3.7bn in returns, excluding regular dividends, in the event of a Melrose takeover, the source said.

The GBP 3.7bn would include a GBP 1.4bn upfront cash payment to GKN shareholders, and their 57% share of the Melrose business, which currently has a market capitalization of about GBP 4bn, the source said at the time.

Melrose might have more to hand out to shareholders because of an eventual sale of Nortek, which the company acquired in 2016, agreed the top shareholder. Nortek accounted for 90% of Melrose’s 2017 revenue.

However, the shareholder was wary of the returns getting spread out over a wider shareholder base. GKN shareholders will own 57% of a combined GKN-Melrose.

Accepting Melrose’s offer may mean giving up half of any potential upside due to the larger shareholder base, the investor said, referring to analyst reports he had seen.

Melrose has until 23 April to fulfil all offer conditions, including regulatory and competition approvals.

A combination between GKN and Melrose would have to be approved by the Committee on Foreign Investment in the US (CFIUS) and other US defence and federal agencies; Germany's Federal Ministry for Economic Affairs and Energy (BMWi) and the French Ministry of Economy.

Melrose’s bid for GKN has raised national security concerns. The transaction has reportedly been questioned by the UK Government’s Defence Secretary Gavin Williamson, while others such as Labour party leader Jeremy Corbyn and Liberal Democrat leader Vince Cable have said the proposed deal would harm industry in the UK.

Besides the security clearances, the deal requires competition clearances from authorities in the US, EU, and Canada, and may need to be reviewed in countries such as Australia, Colombia, India, Mexico, Russia, South Africa, Taiwan and Turkey.

Melrose and GKN declined comment.