GKN should be no pushover as Melrose bid turns hostile

GKN has been under-managed but has excellent assets, with Airbus, Boeing and most of the world’s big car makers among its customers.
Photograph: Bloomberg/Bloomberg via Getty Images

You cannot blame Melrose Industries for firing off its £7bn hostile offer for GKN, the UK’s last big automotive and aerospace combo, after less than a week of informal exchanges. The bidder has had the better of the warm-up action, so best to kick off early.

Melrose’s shares had floated upwards, generating momentum behind a 430p a share offer where only 81p is in actual cash. But look at how the target’s shares have been electrified. GKN investors, if they wish, can now sell in the market at an all-time high of 448p, versus 320p at the start of the year.

Meanwhile, since any equity-heavy offer is really about who gets to manage the assets, the chat has concentrated on the boardroom lineups. Melrose holds aces. A single pound invested when the company was formed in 2003 as a sort of regathering of the 1990s Hanson clan is now worth £17.70.

The Liberal Democrat leader, Sir Vince Cable, may regard Melrose as an ugly crew of financial engineers, but it is not the City’s view. In any case, Cable should save his grumbles in case even more hard-nosed operators – think private equity – try to gatecrash proceedings. Melrose buys and sells companies, but the numbers show it also invests in them.

And the GKN record? Mixed, at best. A strong recovery from 2009 to 2014 has ground to a halt. GKN itself concedes it needs to improve its profit margins and will unveil its “Project Boost” shortly. But it is starting with the serious disadvantage of a botched succession. The former non-executive Anne Stevens, an former Ford veteran, has been installed as boss but is plainly too new to have a Melrose-style fan club.

So is it obvious that Melrose will win? It is favourite but, no, this is not a done deal. GKN’s pensions trustees are the other player, as they should be given that the deficit is £1.1bn on one accounting basis. The trustees are within their rights to demand a big one-off contribution as the price of agreeing a change of control. Melrose, with a business worth £4bn, can plead that it arrives with a clean pension position, but nothing talks like upfront cash. A demand of £400m for the pension pot, as some analysts speculate, could change the arithmetic.

Then there is the vague sense that Melrose’s clever chaps are being too cute with their mostly shares offer. GKN may have been under-managed, but it plainly has excellent assets – it supplies Boeing, Airbus and most of the world’s big car manufacturers. If a credible self-help plan can be presented, there should, in theory, be no need for shareholders to turn to an emergency corporate doctor. Owning 100% of a better managed GKN ought to be better than diluting the rewards. The trick is to stop chasing sales and concentrate on profit margins, which is roughly what Melrose recommends.

Stevens will have to play a blinder: her personal credibility will be critical to the outcome. But GKN investors should start with an open mind. Melrose’s first offer is clearly not its best offer. And GKN’s next strategic plan can’t be worse than its last one.

A man walks past a Carillion construction site. Is Sally Morgan among those who should have spotted the extent of its crisis sooner? Photograph: Paul Ellis/AFP/Getty Images

Carillion inflicts pain on masochist Morgan

Ministers are getting flak for being slow to spot the crisis at Carillion, but let’s not overlook the Labour peer Sally Morgan.

She joined Carillion’s board as a non-executive director on 1 July last year, at which point the hedge funds were in full riot. Some 25% of the stock was out on loan, a rare sight in the stock market, especially at a company that (at the time) was still valued at more than £1bn.

For anybody sitting on an offer of a non-executive job, the hedge funds action was surely a cue to do a double round of homework, make more calls and worry that becoming a director of Carillion might not be a career-enhancing move.

Morgan, one supposes, still had good civil service contacts to tap for advice from her time as Tony Blair’s political secretary. And she definitely had an extra reason to be cautious. One of her former non-executive adventures came at the ill-fated Southern Cross Healthcare – she was on the board from flotation in 2006 to corporate demise in 2011.

When Carillion issued its monstrous profits warnings 10 days after Morgan’s arrival, she then agreed to become the senior independent director with a place on all the main committees – audit, remuneration, nomination and business integrity.

Her reward for that selfless act of masochism, one assumes, will be a walk-on role at the inevitable select committee inquiry – not a great return on six months’ worth of non-exec fees.

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