Engineering turnaround specialist Melrose Industries (MRO) is expected to up its offer price as it tries to pull-off the takeover of planes and cars parts group GKN (GKN).

On 12 January GKN’s board rebuffed a 405p per share cash and shares offer from Melrose. That was followed by a 430.1p second offer on 17 January, also rejected by the aerospace and automotive engineer.

Melrose has launched a charm offensive in an attempt to woo GKN shareholders. This is often the first step towards the launching of a hostile takeover, where the would-be buyer bypasses the target company’s board of directors and tries to win support for a buyout directly from the most influential shareholders.

On 15 January Melrose published a detailed analysis arguing the investment case for its proposed takeover of GKN. Melrose plans to have discussions with GKN’s main shareholders, including Blackrock, Standard Life and Vanguard, to explain its action plan.

That move has been swiftly followed by the intervention of activist investors.

Vulcan Value, an American activist fund, has called on GKN directors to open talks with Melrose. Vulcan owns a 2.13% stake in the engineering group. Elliott Capital, another activist fund, on 15 January disclosed that it too has taken a stake in GKN, believed to be through contracts for difference.

BLACK HOLES AND REVELATIONS

GKN was seriously caught out in October last year when it over-egged demand for plane spares on several long-running programmes. Particularly galling was that it massively under-estimated the extent of the problem, the company’s initial £15m predicted write-off of parts eventually emerging as a black hole worth between £80m and £130m.

That cost Kevin Cummings, the boss of GKN’s aerospace arm, his job. That was a blow since Cummings had been earmarked to succeed outgoing chief executive Nigel Stein.

GKN’s share price accordingly crashed from 352p to 298p in the weeks that followed and analysts began calling in to question the company’s ability to maintain its dividend.

COMPELLING MELROSE RECORD

Many observers believe that Melrose’s track record at turning engineering businesses around will be hard to resist for GKN shareholders. Analysts at investment bank Berenberg estimate an improved offer of around 455p per share would very likely swing the vote Melrose’s way.

Assuming a higher offer is similarly structured on an 80%/20% split between Melrose stock and cash, it would allow GKN investors to crystallise a fifth of their holding at a large premium to pre-bid share price, and still participate in any upside through a remaining stake in Melrose.

‘There is an air of inevitability that GKN will end up being owned by Melrose,’ says Berenberg. (SF)

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