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Investors Spurn Hostile Bid for Engineering Giant

Fund managers say that the proposed takeover of GKN is an unwelcome distraction.

Investors in British engineering group GKN are railing against a hostile takeover bid from Melrose Industries, claiming the bid undervalues the business.

As a FTSE 100 constituent, GKN is widely held in equity portfolios. Active strategies invested include Royal London’s £760 million ($1.1 billion) U.K. Opportunities Fund, Janus Henderson’s £390 million U.K. Equity Income & Growth, and the £212 million Canada Life U.K. Equity Income funds, according to FE Analytics data. 

GKN’s largest shareholders are BlackRock, owning 5.8 percent, Bank of America (5.6 percent), and Singaporean sovereign wealth fund GIC (3 percent), company’s website showed. It employs some 58,200 employees.

Melrose — a turnaround group specializing in manufacturing businesses — wrote to shareholders on Thursday, formally offering £0.81 ($1.15) in cash and 1.49 new Melrose shares for each GKN share held. 

“Since we approached your board, the GKN share price has risen from 326.3 pence to 422.8 pence today, which has already created approximately £1.7 billion of value for you,” chairman Christopher Miller said in the letter. “If you accept our offer we can together create a UK engineering and industrial powerhouse.”

However, fund managers invested in the group told Institutional Investor that they considered the offer to be lower than the value of the business. Their reaction will be welcomed by GKN chief executive Anne Stevens, who earlier in the day described the offer as “derisory.”

Jon Sigurdsen, a lead portfolio manager at DNB Asset Management, told II that the bid comes “at a delicate point in time” for GKN. “Today’s bid undervalues the business and is more likely to trigger a revaluing of the stock. Equity markets are higher than they have been for the past 10 years, so it is not a particularly high offer,” he said. 

Sigurdsen suggested that investors would do better to consider the offer alongside GKN’s late 2013 and early 2014 share prices, rather than more recent values. GKN traded at £4.13 on February 21, 2014, for example, compared to £2.98 on December 15, 2017.

“There were company-specific factors impacting the share price last year, which, in my opinion, were one-off in nature,” Sigurdsen said.

James Henderson, a Janus Henderson portfolio manager and director, said he would like to see the bid from Melrose “disappear.”

“They are a big distraction to management,” Henderson said in an interview. “This will be very time consuming over the next few months. While there is a big fan club of Melrose supporters, GKN is a huge business, operating in many different locations and markets. Takeovers and acquisitions are difficult enough, without them being contested.”

[II Deep Dive: Boardroom ‘Gut Check’ Set to Drive M&A]

In Thursday’s letter to shareholders, Melrose pledged an additional £150 million for GKN’s pension schemes if investors accept its takeover terms.

The aspiring buyer said it has been “a good steward” of previous acquisitions’ pension schemes, and promised to put in place deficit reduction programs at GKN and “maintain prudent levels of leverage.”

But one consultant warned that Melrose’s plan would likely expand GKN’s pension deficit, not reduce it. “Melrose has said, publicly, that it plans to increase debt levels,” Martin Hunter, principal at Xafinity Punter Southall, told II. “Increased debt means the company has to use more of the cash that it generates every year to service the debt. This leaves less to pay into the scheme.”  

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