London — Turnaround specialist Melrose raised the pressure on GKN by turning hostile in its pursuit of the British engineering company, making a firm £7.4bn offer for the business after meeting its shareholders.

The 430.1p-per-share bid was swiftly rejected by GKN on Wednesday on the grounds that the terms of the paper-and-cash offer are "effectively unchanged" from a first, unsolicited approach made by Melrose in private on January 8, which GKN also spurned.

The engineer made Melrose’s initial bid public on January 12, when it also outlined an alternative plan to break itself in two by separating its aerospace and automotive parts divisions.

"We believe GKN’s current owners should retain all the benefits of the clear upside potential in GKN, rather than handing almost half of this upside to Melrose and its shareholders," newly appointed GKN CE Anne Stevens said on Wednesday.

"We have already stated that the terms of Melrose’s offer fundamentally undervalue the company and we are actively engaging with shareholders to explain how our transformation plan will provide value."

Direct Appeal

The battle between the two British companies has quickly escalated since Melrose’s initial January 8 bid, which at the time valued GKN at 405p-per-share.

GKN’s rejection of the offer prompted Melrose to start meeting GKN’s shareholders this week to discuss its proposal.

A source close to Melrose said on Wednesday that those investor meetings had accelerated the company’s decision to make a firm bid for GKN. This hostile move means that Melrose is taking its offer directly to GKN’s shareholders.

Melrose is attempting to snap up GKN after the engineer was left weakened by profit warnings in October and November, double blows that were both sparked by problems at its aerospace division and sent its shares sharply lower.

GKN’s vulnerability was exacerbated by its lack of a permanent chief executive until the 69-year-old Stevens was appointed last week.

Kevin Cummings, who had been GKN’s CEO-designate to replace the retiring Nigel Stein, left the engineer in November following its second profit alert.

GKN, whose roots date back to the 18th century, makes parts for the Boeing 737 jet, Black Hawk helicopter and components for Volkswagen and Ford cars.

Melrose’s business model is to buy engineering companies, improve their margins and resell them. It owns the diversified Nortek and the Brush electricity generating equipment businesses, and has a market capitalisation of around 4.6 billion pounds. GKN is currently valued at £7.6bn.

Unchanged terms

Melrose said on Wednesday that it is offering 1.49 new Melrose shares and 81p in cash for each GKN share, identical terms to its January 8 bid.

The hostile offer values GKN at 430.1p-per-share based on Melrose’s closing price of 234.3p on January 16.

Some market participants criticised Melrose offer, pointing out that proposal had only increased in value from the earlier 405p-a-share bid because the suitor’s stock has risen since its first approach was made public last week.

"It’s the same terms. The headline number is higher because the share price appreciated," said a London-based hedge fund manager with a stake in GKN. "I’m a bit surprised Melrose are as aggressive as they are but I think they have a good case."

A source familiar with the situation said earlier this week that Elliott Advisors, a GKN shareholder, believes it should open talks with Melrose, although the activist hedge fund deems the bidder’s current deal is unattractive.

In a presentation released on Monday, Melrose described "GKN’s current position as an overly complex and undermanaged organisation without focus which needs a fundamental change of culture and leadership".

GKN shares were almost unchanged at 442.7p before midday, while Melrose was down 1.4% at 230.8p.

The 430.1p-per-share offer represents a premium of 29.3% to GKN’s close on January 11, the day before Melrose’s initial proposal was made public. Since then shares have risen by about a third to trade above the offer price.

"Melrose share price has risen as the market digests the attractive opportunity our proposal represents," Melrose CE Simon Peckham said.

"The real value uplift will come from merging the interests of the two sets of shareholders and creating a business valued at approximately £11bn today," he said.

Hedge funds OZ Management and Marshall Wace revealed long positions in Melrose on Friday while others, including AQR Capital Management, Permian Investment Partners and Elliott Advisors, are betting Melrose shares will fall.

GKN shareholders would own about 57% of the enlarged firm, Melrose said, adding that its board considered the terms of the deal to be "fair and reasonable".

The plan to break-up GKN has spurred speculation that either a counter-bidder could come in for one of its divisions, or make a rival offer for the whole company.

Rothschild, RBC Europe and Investec are advising Melrose, while GKN is working with Gleacher Shacklock, JPMorgan Cazenove and UBS.


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