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GKN – A Strategy to Deliver, Establish and Separate By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

 

 

 

 

14 Feb 18. Publishing its ‘Moving GKN To A World Class Financial Performance’ forward strategy document and that comes in the wake of an opportunistic and undervalued hostile takeover bid from Melrose, the GKN Board has today set out plans to return up to £2.5 billion to shareholders under the already announced ‘Project Boost’ improvement programme.

The new forward strategy announced today confirms that GKN is targeting substantial cash returns to shareholders over a three year period and that a “significant” part of this will come from divestments to be made during the first 12 to 18 months and that are thought likely to include sale of its valuable Powder Metallurgy division. There are other low hanging fruit too and GKN has also stated that its dividend policy until 2020 will aim to deliver an average payout of 50% of free cash flow.

GKN CEO, Anne Stevens, has noted that the ‘Project Boost’ strategy brings clarity, accountability and focus to GKN’s world class businesses and that this will allow the group to attain world class financial performance. From a financial aspect, GKN intends that the new strategy will bring forward recurring annual cash benefit of £340 million by the end of 2020 and that this will deliver surplus cash of up to £2.5 billion for shareholders over the next three years – a significant part of this emanating from divestments to be executed over the first 12 to 18 months.

With a new and strengthened board that now has Anne Stevens as Chief Executive and Jos Slater as Finance Director, I am in no doubt that GKN is now very well positioned to carry out its strategic and operational intentions.

What GKN shareholders do not need right now is a company such as Melrose that neither understands nor has any intention to grow businesses that it acquires and whose record, so far, has been based almost purely on attempting to buy on the cheap when shares of a company in its sights look down and out. What so often happens next in these situations if they are successful is that the buying company effectively assets strips without showing any concern to long term working capital and investment requirement and then, with luck and a fair wind, disposes of the company or parts of it before they then almost inevitably fall on hard times. In the process borrowings in the company in question have been significantly raised before the company is disposed.

With annual sales last year of £10.4 billion, in reviewing both the Melrose offer, GKN forward strategy document and planned intention to deliver more to its shareholders, it is important to remember that GKN has achieved many of its current leading technology and market positions in both its aerospace and automotive sectors because it knows its markets and it supports its customers. GKN has very strong and long standing customer relationships that are supported by its extensive global manufacturing and engineering footprint and that because of the scale of what the company has achieved there is significant value that the new Board intend to realise. As we have seen during this past week, in respect of GKN activities in the defence sector in the US, doubts have been expressed as to the unknown quantity of Melrose and to the companies that, if successful in its bid for GKN, Melrose might wish to sell defence subsidiaries on to. The same might apply to other aspects of the huge GKN portfolio of interests.

Important too is that because of the longstanding and sustained focus on research and technology development and investment, the very strong business positions that the company has already achieved are very sustainable against increased levels of competition. Take the R&D away and those businesses would be put seriously at risk.

Leadership positions established in large and still rapidly growing markets such as Aero Engines, eDrive Systems and Aero Additive Manufacturing very clearly demonstrate the strength that GKN has achieved and that will benefit performance in the future. These are very important low hanging fruits.

The point here is also to remember that GKN has through the years made significant long term investments and it is this together with a revitalised strategy that as we know, now includes separation plans along of course with the continuing achievement of ever greater efficiencies that allow the Board to be confident in their expectation of the ability to generate considerable growth, profits and cash flow for decades to come. Important in all this too is that the new GKN Board believes that its shareholders should receive 100% of the benefit of such investment and change.

My understanding of the ‘Project Boost’ plan will consist of three segments: Firstly to deliver strategies for different product segments with “rigorous” capital allocation. Secondly, GKN intends to establish a culture based on greater accountability, capability, and pace and finally, the company intends to separate operations where it would maximise shareholder value.

GKN has also said this morning that it has already begun the separation of its Aerospace and Driveline divisions and that from 2020 the company will be targeting total group trading profit margins above 10.5% – against the anticipated 7.4% margin expected for FY 2017 results. For the whole Project Boost programme, GKN anticipates total one-off costs of GBP450.0 million of which 32% will be incurred in 2018, 44% in 2019, and the rest in 2020.

The bottom line is that unlike some of the companies that Melrose has previously acquired GKN is not a recovery situation. It is however a large company that recognises the need to change and that delivery of performance through separation and strategy change are the way forward.

The underlying strength of GKN is not in question but the perception of value achievement and enhancement is and this is what will now be addressed by a new GKN Board of Directors that is in my view more than fit for the purpose.

Given the high market share and dominance that GKN has achieved in driveline, aerospace and defence together with some other of its activities and the additional scope that the company now has to add significant shareholder value, I continue to take the view that GKN shareholders would be taking a very high level of unacceptable risk should they accept the much undervalued Melrose bid.

CHW (London – 14th February 2018)

Howard Wheeldon FRAeS

Wheeldon Strategic Advisory Ltd,

M: +44 7710 779785

Skype: chwheeldon

hwheeldon@wheeldonstrategic.com

@AirSeaRescue

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