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GKN – Winning The Argument By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

 

 

 

It is around ten weeks now since Melrose presented what many regard to have been an audacious, opportunistic and significantly undervalued bid for engineering company GKN on the 12th January this year and which then valued GKN at just 405p per share and £7bn. Since then I have regularly sought to provide reasons why GKN shareholders would, in my view, be very much better off both financially and in in risk terms by backing the GKN Board. I will continue that theme today.

In my immediate previous piece (copies available on request) and in respect of Enterprise Value (EV) and which it seems that Melrose decided to value GKN Aerospace activities on the same basis as those of GKN Automotive Driveline, I suggested that my own valuation of GKN Aerospace was closer to double that of the EV that Melrose has placed on the GKN Automotive Driveline business.

In that piece which was sent out from me on the 12th March, I said that “Whilst placing an EV multiple of 7.5x on Automotive Driveline may, in that particular market field, be considered reasonable ample evidence exists to show that Aerospace activities, particularly when they involve specialist aero engines, can and do command EV multiples near double the level that Melrose has valued them within its offer for GKN and that, as GKN had said in an earlier announcement, that the company has already rejected approaches for the aerospace business at values well above that offered by Melrose”. 

I would today add that even my EV valuation of GKN Aerospace activities should be considered conservative.

Today in what I suspect will be the penultimate commentary piece on the Melrose bid for GKN ahead of the bid closure on the 29th March, I will also look at what it is that Melrose has achieved from various of its earlier acquisitions and takeovers. I do not know Melrose and I have not studied whether through its many acquisitions and disposals it has bought value to its shareholders or not. I accept that Melrose has given some cash back to its shareholders but in order to achieve its aims it has also issued a lot of shares. Some of the acquisitions that it has made in the past may well have deserved to be taken over and maybe even broken up, closed or disposed. But that in my view, outside of what GKN management has planned itself, that is not the case with this Melrose bid attempt. Indeed, GKN’s new management have been very quick in their actions and response – a response that is designed to enable the company to progress in the manner that shareholders want and indeed, fully deserve. They are well worth backing and in my view, the benefits are free of the risks that in my view would come with accepting the Melrose bid.

First, because it is always wrong to assume that everyone knows who GKN is and what it does, allow me remind that GKN is a UK based Automotive Driveline components, Aerospace components and Powder Metallurgy business that operates in 30 countries worldwide. GKN has a manufacturing presence in many Continents and approximately 59,000 employees worldwide. Of these around 6,000 work in the ten different UK locations [Birmingham, Bristol, Telford, Luton, Portsmouth and Cowes]. There are just eight days left to go until March 29th when we find out whether GKN investors have accepted or turned down the opportunistic £8.1 billion hostile bid from Melrose.

My own stance backing GKN management is already well known and it is pleasing to see more of GKN’s institutional shareholders such as Jupiter Asset Management, Lancaster Investment Management, Pelham Capital and Sanderson Asset Management backing the actions that the GKN Board have put forward. These actions include a joint venture deal agreed with Dana in relation to GKN’s automotive driveline business that will see Dana have a 52.75% interest and GKN shareholders holding 47.25% together with the US based Dana taking a secondary listing on the London Stock Exchange. In addition GKN shareholders are promised $1.6 billion of cash together with shares in the enlarged Dana operation worth $3.5 billion.

Taking into consideration the much higher value and huge growth opportunities provided in what will be the retained aerospace division I believe that what the GKN Board has been able to achieve in such a relatively short period will not only provide shareholders with a far more risk free and secure outcome than is being offered to them by Melrose but also a great opportunity for them to participate in the growth of what will continue to be a very important UK based engineering and manufacturing group.

And now, as promised, a reminder of what Melrose is all about and what it has achieved from the various acquisition and takeover deals on the past. While Melrose promises to invest and to help grow companies the reality, as the record below clearly demonstrates, is that  the company is merely a ‘break-up’ merchant pursuing the ideals of Slater Walker and its subsequent like:

MELROSE TRACK RECORD IN THE UK

 Dynacast

Dynacast, a manufacturer of precision castings, was acquired by Melrose along with McKechnie, which apparently accounted for half of the amount, for an Enterprise Value of £429 million in 2005. What was left of Dynacast by then was sold six years later for an Enterprise Value of £377 million but as Hinted, not before substantial capacity in ‘old world’ was taken out and much production was shifted to cheaper countries such as in Asia and Mexico.

In August 2005 the Dynacast factory in Alcester, Warwickshire which was the small towns’ largest employer with 56 employees was closed. The excuse for closure and redundancies was apparently that looser UK employment laws and the fact that Dynacast owned the UK site meant that it was easier to close the UK plant than that of its French plant.

Melrose sold Dynacast in 2011 to Kenner & Company, the US private equity group.

 McKechnie plc

 What remained from the former Aldridge, Staffordshire based McKecknie Brothers had been acquired by Melrose from Cinven in 2005. Melrose was quick to close the McKechnie Burnett Polymer Engineering plant in Northampton with the loss of approximately 120 staff redundancies and it followed this up by cutting jobs at the McKechnie plastic components plant in Pickering, Yorkshire.

In 2006 Melrose closed the McKechnie industrial metal fasteners plant at Willenhall near Wolverhampton and moved production to China. The principal exit was yet to come, that of McKechnie Aerospace which it then sold to JLL Partners, a US private equity firm, for US $855m in March 2007, only 23 months after its acquisition.

[Note here that Melrose has protested that GKN is proposing to sell Driveline to a “foreign buyer”]. Up to now, McKechnie Aerospace is the only sizeable Aerospace related activity that Melrose has owned and it only retained it for less than two years.

 FKI Group

 Based in Loughborough, Leicestershire, FKI Group (formally Fisher Karpark Industries) was acquired by Melrose in July 2008.

Melrose wasted little time in starting to sell businesses of and, by my reckoning, had over the next six years disposed of no fewer than 15 of these. Other notable moments include 75 job losses at Hawker Siddeley Switchgear in Blackwood, South Wales [this was a subsidiary of Brush Engineering which came in with the FKI acquisition] of which local councillors and MPs at the time described as being “devastating” and “a body blow for the area”.

At Brush Loughborough turbo-generator (gas turbine) plant, Melrose implemented a particularly aggressive job cutting programme. The plant had circa 1,200 employees when acquired by Melrose and today has less than 300, a decline of over 75%. The latest round of job cut announcements – 270 – was announced earlier this year. Criticism from a local MP and from Unite Trade Union that the most recent losses will “hollow out the region’s engineering skills base” can hardly be argued but I don’t suppose Melrose senior management care about that. While Melrose may well be right in suggesting that the Brush business had peaked in 2011 one may question why, having had the opportunity to invest in the next generation of clean energy turbines, it failed to do so. I believe that Melrose is also in the process of closing the Brush plant in the Netherlands.

Another company that came in with FKI was Bridon. Formally Bridon Ropes and a quoted company before it had been acquired by the former FKI management team of Gartland and Whalley, Bridon which primarily made Wire Ropes could claim to be one of Britain’s Oldest Industrial Companies. The company underwent some of the most aggressive cost containment under Melrose ownership and was eventually sold to the Ontario Teachers’ Pension fund in 2014. They in turn sold it to the Austrian company, Bekaert.

During the short period of FKI and Bridon ownership, Melrose has built just one new UK factory in Newcastle at a cost of £20m. By contrast, it is worth noting that GKN invested £250m in the Western Approach Aerospace plant near Bristol which was opened in 2013.

In 2011 Melrose sold Brush Traction, originally part of Brush Group and that had been owned for many years by Hawker Siddeley before that company was ‘raped’ by a fast failing BTR management and that could also claim to be one of Leicestershire’s oldest engineering firms, was sold to Wabtec Corporation from Pennsylvania, US, for £19m

As I made clear in an earlier piece, Melrose still owns the struggling Brush turbo-generator plant but it surely isn’t hard to see that under its ownership the writing is on the wall. Having already having undergone significant restructuring, a shift of some production overseas and many redundancies, having failed to invest in its future all that I can say is that the future looks bleak.

Nortek

 Acquired by Melrose in August 2016 for an Enterprise Value of $2.2 billion, Nortek was described as being a global, diversified group. I know little about the company except that one particular Nortek subsidiary is Eaton-Williams which, having been founded in 1936, can probably claim to be one of the UK’s oldest air conditioning equipment manufacturers. But not surprisingly, from a jobs aspect at any rate, under the short period of Melrose ownership, the acquisition of Nortek is yet another tale of woe as by October of the same year Melrose had announced the closure of Eaton-Williams’ two sites at Edenbridge, near Sevenoaks, and at Stoke with the loss of 110 jobs. Nortek is primarily a US based manufacturer of air management and security systems.

Conclusion:

Mindful that Tom Williams, Chief Operating officer of Airbus and whose business building airplanes accounts for 6% of GKN Aerospace business said [of Melrose being a potential owner of GKN] has stated very clearly that “The [aerospace] industry does not lend itself to shorter-term financial investment which naturally reduces R&D budgets and limits vital innovation. “It would be practically impossible for us to give any new work to GKN under such an ownership model … and that this well describes the Melrose business model and strategy, the dangers and risk of GKN shareholders going the Melrose route is surely more than self-evident.

CHW (London – 21st March 2018)

Howard Wheeldon FRAeS

Wheeldon Strategic Advisory Ltd,

M: +44 7710 779785

Skype: chwheeldon

hwheeldon@wheeldonstrategic.com

@AirSeaRescue

 

 

 

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