Critics have accused Melrose of being an 'asset stripper' looking to a dismember a historic and nationally important British company
Shareholders in UK engineering giant GKN have until 1pm on Thursday to decide whether to vote in favour of an £8.1bn hostile takeover by investment firm Melrose industries.
The deal would the biggest hostile takeover of a UK company since Kraft bought Cadbury's in 2010.
Like that deal, it has been highly controversial. The business secretary, Greg Clark, belatedly waded in this week to raise concerns and push for reassurances from Melrose’s management over pensions and jobs, while saying he was “mindful” of national security issues.
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But what are the two companies and why has the takeover caused so many issues?
What is GKN and why is it important?
GKN is a British engineering firm with a history going back to the birth of the industrial revolution. The company traces its roots back to an ironworks founded in Merthyr Tydfil in 1759. Now it is a major supplier of parts for the aerospace and automotive industries and one of the UK’s largest companies with a turnover of £10.4bn, operations in 30 countries and almost 60,000 employees, with 6,000 of those in the UK.
It has a number of Government contracts and is involved in sensitive defence programmes such as Lockheed Martin’s F-35B fighter jet, 138 of which have been ordered for the Royal Air Force.
What is Melrose?
Melrose is a British investment company established in 2003 that buys and sells struggling firms. It bills itself as a turnaround specialist, but critics, including the Unite union, say it is an old-fashioned asset stripper.
They say it takes advantage of companies facing problems to buy up the shares cheaply before breaking those companies up and selling off their constituent parts for a profit.
A group of 16 MPs wrote to the business secretary earlier this month urging him not to allow the “dismembering” of GKN.
Melrose typically has a short-term outlook, aiming for an “exit” – ie, to sell the business, or what’s left of it, for a profit – within three to five years.
These profits can be huge. Investors in Melrose received more than £2bn after it sold Elster, a water and gas meter manufacturer, to US giant Honeywell in 2015.
Melrose had a turnover of £2.1bn last year, much smaller than GKNs. It is able to take over much larger companies through taking on debt, which it pays back through profits made selling the firms on.
Supporters say there is nothing wrong with this approach, arguing that Melrose and other firms with a similar private-equity style business model are simply finding efficiencies that the management of companies they take over have not exploited.
Julian Jessop, chief economist of the free-market think tank, the Institute of Economic Affairs wrote in a blog post about GKN: “The fact that a company might be worth more in parts than as a single entity would imply that breaking it up is the right thing to do.”
Why has this takeover caused so much concern?
These types of deals are not uncommon but this one has caused particular outrage for a number of reasons. The long heritage of the firm touches a nerve but, more importantly, concerns have been raised over national security.
GKN supplies parts for the supplies components for the Typhoon fighter jet and A400M military transport aircraft as well as the aforementioned F-35. Gavin Williamson, the defence secretary, said last week that he had written to the business secretary, with “very serious concerns” and raised “a whole series of questions” about the takeover. However, much of GKN’s defence business is with the US.
The business secretary has also expressed concerns over the compatibility of Melrose’s business model with a need for long-term stability at GKN. Many defence contracts are negotiated over significantly longer timeframes than the five years that Melrose has committed to.
Any breaking up of the company could potentially see UK job losses and also have an impact on the UK’s aerospace industry as GKN is a major supplier to Airbus and Boeing. The Pensions Regulator has also raised the alarm over what will happen to GKN’s pension fund which is currently in deficit.
As a key player in some vital national industries, GKN is seen as a big test of Theresa May’s much heralded industrial strategy which was supposed to herald a more interventionist approach from the Government.
So what has the government done?
Not much, until this week when Mr Clark wrote to Melrose’s chief executive Simon Peckham to request binding reassurances from the firm over its intentions after the GKN takeover, should it go ahead.
He said the turnaround specialist would have to agree to binding, “extensive and clear” commitments on its intended conduct if the deal goes ahead.
Mr Clarke said Melrose would need to commit to treating suppliers well, guarantee minimum levels of investment and submit plans for funding GKN’s pension scheme that satisfy the regulator.
In a response Melrose pledged not to sell GKN’s aerospace division and said it would maintain GKN’s UK listing and headquarters, as well as ensure that a majority of its directors are resident in the country during that time. The company also promised to keep research and development spending at 2.2 per cent of revenues or more.
Unite branded them “inadequate” and said they may not even be enforceable while GKN chairman Mike Turner said they were “drafted in increasingly hysterical language”.
Shareholders will vote on whether to accept the tabled deal with the deadline to do so falling at 1pm on Thursday. At least 50 per cent must agree to the takeover for it to go ahead. Some analysts have predicted that the share price will slump if the deal is blocked.
In his statement to the House of Commons on the proposed takeover, Mr Clark’s words left open the possibility that the Government could still intervene in the event that Melrose is successful.