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GKN - Offer rejected, Automotive and Aerospace to separate

Nicholas Hyett | 12 January 2018 | A A A
GKN - Offer rejected, Automotive and Aerospace to separate

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The GKN board has rejected an offer from industrial turnaround specialist Melrose. The offer valued GKN at 405p per share and comprised 81p in cash per share with the remainder made up of Melrose shares.

GKN also announced it intends to separate the Aerospace and Automotive units, with further details to be determined at a later date.

The shares rose 20% in early trading to 400p.

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Our View

To say things are busy at GKN is an understatement.

Having rejected a sizeable offer from Melrose, the Board has embarked on the long-rumoured breakup of the business. Timing and details are yet to be confirmed, but it's now pretty clear that automotive and aerospace will ultimately go their separate ways.

In all probability GKN's sprawling footprint contributed to the unexpected profit warnings we saw at the end of last year. A £1.8bn pension deficit has historically held the group together. But with, margins struggling in Aerospace, and Automotive demanding increased investment to manage the transition to electric vehicles, the arguments for divorce now seem to outweigh the costs of splitting.

The newly announced 'Project Boost' transformation plan aims to correct a deterioration in margins that has seen profits and cash generation lag behind sales growth. Cost savings are likely to be high up the priority list, although there are no numbers on that as yet, while the group also expects to trim some of its non-core operations.

If all goes to plan, two slimmed down but still sizeable standalone businesses should emerge. Automotive has a strong position in the drivetrain technology that is central to the increasingly popular SUV market, while Aerospace should benefit from ongoing growth in the aviation market.

With Melrose still in the hunt, the challenge for newly confirmed CEO Anne Stevens is to convince investors she can deliver better returns than the 405p the Board has already turned down.

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Melrose offer, planned separation and trading update

The GKN board described the Melrose offer as "entirely opportunistic" adding that "the terms fundamentally undervalue the Company". Melrose now has until 5pm on 9 February 2018 to announce whether it intends to make a firm offer for GKN or not.

GKN also announced that the Board believes separating the Aerospace and Automotive businesses will help maximise shareholder value by setting distinct strategic, operational and financial objectives for each business. The Board will give further details on how it intends to do this in due course.

Accompanying this decision is a two year initiative (Project Boost) to improve cash and profit in both parts of the business. It includes plans to optimise 'procurement, process & productivity, and capital allocation' and will also include the disposal or closure of non-core operations.

A brief trading statement accompanying the announcement confirmed that the group continues to expect profit before tax for the year to be slightly ahead of last year's £678m. This is before accounting for the previously announced substantial write-offs in the North American Aerospace business.

Anne Stevens, previously interim CEO, has agreed to take on the position of CEO with immediate effect.

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