BATTLESPACE ALERT Vol.20 ISSUE 06
09 March 2018
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Proposed combination of GKN Driveline and Dana
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Proposed combination of GKN Driveline and Dana
09 Mar 18. The Board of GKN plc (‘GKN’) is pleased to announce that GKN has reached agreement with Dana Incorporated (‘Dana’) on the proposed combination of GKN’s Driveline business1 (‘GKN Driveline’) and Dana (the ‘Proposed Transaction’) to create Dana plc, a global leader in vehicle drive systems (the ‘Combined Group’ or ‘Dana plc’).
Compelling strategic rationale for GKN
- Represents an acceleration of GKN’s strategy of separating its Aerospace and Driveline businesses, while also providing enhanced value to GKN’s shareholders.
- Brings together two highly complementary businesses and creates a global leader in vehicle drive systems across all three mobility markets – light vehicle, commercial vehicle and off-highway.
- Combines two companies with rich heritages, similar cultures and a long history of working together.
- Delivers significant synergies.
- Following the divestment of Powder Metallurgy and other non-core businesses, will leave GKN as a focused, world class aerospace company.
Summary Financial Terms of Proposed Transaction
- GKN’s shareholders to receive 47.25% of the fully diluted share capital of Dana plc at completion of the Proposed Transaction (‘Completion’). Based on Dana’s fully diluted share capital and closing share price as at 8 March 2018 (being the last trading day prior to the release of this announcement) (the ‘Last Business Day’) of $26.20, this equates to a value of $3.5 billion (£2.5 billion); plus
- GKN will also receive $1.6 billion (£1.2 billion) in cash2 after deducting for the transfer of $1.0 billion (£0.7 billion) of GKN’s IAS 19 pension deficit as at 31 December 2017 (net of deferred tax)3 to the Combined Group.
Therefore, based on the closing share price of Dana as at the Last Business Day of $26.20, the Proposed Transaction values GKN Driveline at a total enterprise value of $6.1 billion (£4.4 billion), equivalent to a 2017 EV / EBITDA multiple of 7.5x.
Transaction highlights
- Annual run-rate synergies of $235 million4 (£170 million) by the end of the third year post-Completion. These benefits are in addition to the GKN Driveline benefits expected as part of Project Boost, and have no material impact on the overall Boost benefits statement, announced on 14 February 20185.
- Board of the Combined Group will comprise a majority of independent non-executive directors. Both Anne Stevens, Chief Executive of GKN, and Richard Parry-Jones, independent non-executive director of GKN, will become non-executive directors of Dana plc.
- Dana plc will be a newly-formed UK public limited company. It will be listed on the New York Stock Exchange (the ‘NYSE’) and headquartered in Maumee, Ohio.
- Agreement in connection with the Proposed Transaction reached with the trustees of GKN’s UK pension schemes. Pension position in respect of the ongoing GKN group (‘GKN Aerospace’) to be substantially de-risked.
- Completion expected during Q4 2018, conditional, among other things, on Dana and GKN shareholder approval, certain anti-trust and regulatory consents and the Melrose offer having lapsed or been withdrawn.
Status of the Melrose Offer
On 1 February 2018, Melrose announced an offer for GKN (the ‘Melrose Offer’) which was, and continues to be, rejected by the Board of GKN. The Melrose Offer has not been amended and, unless an extension is granted by the Takeover Panel, the last business day on which shareholders can accept the Melrose Offer is 29 March 2018. The latest date and time by which the Melrose Offer may be declared or become unconditional as to acceptances is 1.00 pm on 2 April 2018.
Superiority of Proposed Transaction over Melrose Offer
The Board of GKN believes the Proposed Transaction, together with the prospects for GKN Aerospace, provides significantly greater value for GKN’s shareholders than the Melrose Offer.
The Proposed Transaction values GKN Driveline at a 2017 EV / EBITDA multiple of 7.5x, similar to the 2017 EV / EBITDA multiple implied by the Melrose Offer for the entire issued share capital of GKN of 7.7x. Aerospace and powder metallurgy transactions are typically completed at significantly higher multiples than transactions within the automotive supplier sector.
The Proposed Transaction also provides GKN shareholders with a significant equity stake in a global leader in vehicle drive systems with significant synergies.
The Board of GKN considers that the Proposed Transaction is in the best interests of GKN and its shareholders and intends unanimously to recommend that GKN shareholders vote in favour of the resolutions to be proposed at the GKN General Meeting. In addition, the Board continues to believe that the Melrose Offer fundamentally undervalues GKN. Accordingly, the Board unanimously recommends that GKN shareholders should take no action in relation to the Melrose Offer and should not sign any document which Melrose or its advisers send to GKN shareholders.
Mike Turner, Chairman of GKN, commented, “This combination of GKN Driveline and Dana will create a US and UK led global market leader in vehicle drive systems. The synergies between these two businesses and our complementary product portfolios make this a great deal for GKN shareholders.
Following the transaction, GKN shareholders will own 47% of a $14 billion revenue, global automotive group and will retain ownership of GKN’s outstanding remaining businesses.
GKN is continuing to pursue the sale of its non-core businesses including Powder Metallurgy. The Board remains committed to delivering up to £2.5 billion of cash returns to shareholders over the next three years.
The Board believes that this strategy is far more attractive for GKN shareholders than the Melrose proposal which fundamentally undervalues GKN and therefore the Board unanimously recommends that GKN shareholders reject the Melrose proposal and vote in favour of the proposed combination with Dana.”
James Kamsickas, President and Chief Executive Officer of Dana, said, “This transformative and strategic transaction solidifies Dana as a world leader in vehicle drive systems and establishes us a leading position in electric propulsion, which we see as the future of vehicle drivetrains.
We have a long history of partnering with GKN, and the companies possess similar cultures and exceptionally talented people. Our highly complementary businesses share a deep understanding of our customers’ long-term requirements. We look forward to delivering value and growth to our shareholders.”
Further details on GKN Aerospace
GKN Aerospace will continue to implement the new strategy that was presented to the market on 14 February 2018. Following the divestment of Powder Metallurgy and other non-core businesses, GKN Aerospace will become a standalone, focused, world class aerospace company. GKN Aerospace will be a leading global tier one supplier of specialty aerostructures, aero engine systems and specialist technologies, including wiring transparencies and ice protection systems. Supported by an attractive long-term cash profile from its Aero Engines RRSP portfolio, GKN Aerospace will be positioned to deliver value for decades to come.
As previously announced, the Aerospace core target margin is at least 14% for the year ending 31 December 2020 (excluding corporate costs described in paragraph 13.3). GKN’s Aerospace business will progress the work already started on Project Boost, which targets a £160 million5recurring annual cash benefit from the end of 2020. The Board remains committed to its previously announced target of returning up to £2.5 billion to shareholders over the next three years, which will be further underpinned by the significant net cash proceeds received under the Proposed Transaction. GKN Aerospace’s dividend policy will be to target an average pay-out of 50% of free cash flow over the period of 2018 to 2020, adjusted to take account of the Proposed Transaction and non-core disposals. GKN Aerospace also expects to distribute surplus cash to shareholders, subject to maintaining an investment grade credit rating.
Further details of the Proposed Transaction
The Proposed Transaction is subject, among other things, to shareholder and regulatory approvals. In view of its size, the Proposed Transaction constitutes a Class 1 transaction for the purposes of the Financial Conduct Authority’s Listing Rules and requires the approval of GKN shareholders in order for it to be implemented. A circular containing further details of the Proposed Transaction and containing the notice convening a general meeting of GKN (the ‘GKN General Meeting’) will be sent to GKN’s shareholders in due course (the ‘Circular’). Completion is also subject to approval by shareholders of Dana (requiring a majority of all Dana shareholders). The GKN and Dana shareholder meetings are expected to be convened and held in early Q4 2018.
Completion is subject to the Melrose Offer being withdrawn or lapsing; each of GKN and Dana may terminate the Proposed Transaction in the event that the Melrose Offer is declared wholly unconditional.
Gleacher Shacklock LLP (‘Gleacher Shacklock’) and J.P. Morgan Securities plc (which conducts its UK investment banking business as J.P. Morgan Cazenove (‘J.P. Morgan Cazenove’) are acting as GKN’s joint lead financial advisers in relation to the Proposed Transaction. J.P. Morgan Cazenove is acting as sponsor to GKN in connection with the Proposed Transaction. Slaughter and May and Cravath, Swaine and Moore LLP are acting as GKN’s legal advisers in relation to the Proposed Transaction.
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