Melrose sweetens GKN bid to £8.1bn

Turnaround specialist Melrose Industries has upped its offer for engineer GKN to 467p per share, or £8.1bn, from £7.4bn.

The deadline for accepting the final offer by Melrose, which would see GKN shareholders own 60% of the company and receive £1.4bn, is Thursday 29 March at 1300 GMT.

GKN said the new offer is still "entirely opportunistic" and "fundamentally" undervalues the group and its prospects.

The sweetened offer comes after GKN announced on Friday that it had agreed to combine its automotive business, Driveline, with US-based Dana in a deal valued at around $6.1bn.

Under the terms of the agreement, which GKN said represents an acceleration of its strategy to separate its aerospace and auto businesses, the company will receive cash proceeds of $1.6bn. GKN's shareholders will also receive 47.3% of the fully diluted share capital of the newly formed company, Dana plc, at completion of the proposed transaction.

Melrose, which said its final offer "will not be increased under any circumstances", said the Dana deal is a "hasty and ill-thought-through transaction" that is prejudicial to GKN's shareholders.

Melrose chairman Christopher Miller said: "On the one hand you can join us on a journey of value creation by investing in a UK listed manufacturing powerhouse worth over £10bn today and receiving £1.4 billion of cash.

"On the other hand your board is attempting a hasty fire-sale of GKN businesses before they have been given a chance to reach their potential and with damaging consequences, we believe, for all stakeholders.

The potential transaction with Dana, if it is allowed to go ahead in the last quarter of this year, would leave you with a minority stake in a foreign listed group run by a Dana management team based in Ohio. Many of you may not be able to hold the shares being offered by Dana as part of the consideration as they will not be listed in the UK. It is surprising that the GKN board would recommend such a transaction knowing that it is likely to require a forced sale of Dana shares, a fact that will be anticipated by the US markets."

But GKN insisted on Monday that the offer was no good, as it does not reflect the value of the company's "world class" aerospace business including the implementation of Project Boost and the creation of a standalone company, which it expects will lead to a positive re-rating in line with peers.

It also said the revised offer fails to reflect the benefits of combining GKN Driveline and Dana or the return of up to £2.5bn in cash to shareholders over the next three years.

Chairman Mike Turner said: "The board believes that Melrose's revised offer continues to fundamentally undervalue GKN and has no hesitation in unanimously rejecting it.

"Shareholders should be aware that Melrose is asking them to accept its acquisition paper at 22x 2017 earnings, in exchange for world class businesses which Melrose's offer only values at 14x 2017 earnings.

"Melrose is not the right owner of GKN. Its management lacks relevant experience and its short term business model is inappropriate for GKN's customers and its investors. Winning new business in our markets would be more difficult if customers were uncertain as to the identity of their future long term partners."

Olivetree Financial said: "A 10% improvement to the transaction terms isn’t to be sniffed at and Melrose can clearly now smell blood. It will be interesting to see whether GKN cede to allow Melrose to slow the offer timetable (allowing them to get CFIUS approval in the offer timeline). In theory, GKN were always likely to do this to give themselves longer to defend the company. With rumours still around about potential aerospace transactions, this is likely to remain the case - but if Dana is all GKN has got they may prefer to force Melrose to close the deal without CFIUS approval (if CFIUS still hasn’t approved within the Offer timetable). Either way we are moving into the end-game here, where GKN shareholders have to decide."

At 1540 GMT, GKN shares were down 2% to 427p and Melrose shares were 4.7% lower at 214.20p.

Rebecca O'Keeffe, head of investment at Interactive Investor, said: "The robust efforts GKN has taken to protect itself from the hostile bid, including the proposed disposal of its Driveline business to Dana, combined with the comments from Melrose that their offer will ‘not be increased under any circumstances’ is leading investors to conclude that GKN has won this battle, at least for now."