Melrose has made a firm bid for GKN on the same terms as its initial approach, revealed last week. The mixed cash and share offer values GKN at £7.4bn, or 430.1p per share, representing a 32% premium to the closing price on the 5 January, the day before the offer was made.
GKN shares rose 0.3% in early trading to 443.5p.
Let the mud flinging begin!
High profile hostile takeovers have been thin on the ground in recent years. That's probably because the risks for both management teams are high, as each tries to paint the other as not up to the job, or just plain delusional.
Melrose has got its punches in early; describing GKN as "an overly complex and under-managed organisation without focus which needs a fundamental change of leadership". Ouch! For its part GKN has branded the offer "entirely opportunistic" and argued that it "fundamentally undervalues" the business.
Rhetoric aside, Melrose believes it can deliver some serious results for shareholders.
Melrose has a history of buying underperforming industrial businesses, improving margins and selling them on for a healthy profit. Its pledge to beat GKN's top-end trading margin target of 10% is not to be sniffed at. Notably, while Melrose does seem to envisage an eventual break-up of aerospace and automotive divisions, it's expected to be some way into the future.
The GKN board have their own plans for margin improvements, and also see value in breaking up the business sooner rather than later. If these plans prove successful, current GKN shareholders could be handing part of the benefit to Melrose investors at a bargain price.
However, at the moment both strategies are just promises. On the one hand, GKN have struggled to grow margins for years, whereas Melrose have a great track record. On the other, GKN management must be best placed to understand the challenges and hurdles that face the business, and while their targets are perhaps less ambitious, that also makes them more achievable.
With Melrose having laid out their stall, the ball is now in newly confirmed GKN CEO Anne Stevens' court. She must convince investors that she can deliver better returns than the £4.30 on offer today.
Melrose - Hostile offer
Melrose's firm offer comprises 81p in cash per share and 1.49 new Melrose shares per GKN share.
Should the offer be accepted, GKN shareholders will own 57% of the enlarged group. The cash portion of the offer would be funded through a new debt facility, although total net leverage is expected to be in line with Melrose's target of approximately 2.5x EBITDA (earnings before interest, tax, depreciation and amortisation).
Further details, including deadlines for voting on the offer, are expected to be announced in due course. Hargreaves Lansdown will contact clients when these details are made available.
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