Alabama Is Sweet Hell for a British Airbus Supplier

(Bloomberg Gadfly) -- What is it with British companies and succession planning? Weeks after the London Stock Exchange Group Plc provoked a row with shareholders over replacing its CEO, GKN Plc has raised the bar for making a hash of things.

The auto and aerospace group said on Thursday that CEO designate Kevin Cummings, due to start on January 1, would now be leaving. The u-turn follows more bad news relating to the North American aerospace division he ran.

None of this reflects well on the chairman, Mike Turner. Stage management at GKN has been poor. The CEO appointment was made in mid-September. Two weeks later, GKN's half-year results alluded to operational challenges in North America. Two weeks after that came a profit warning, attributed mainly to undisclosed claims against the company but exacerbated by writedowns in Alabama. Last week, the finance director, a rival internal candidate to Cummings for CEO, left.

Why didn't GKN's board have a better grasp of what was going on? The problems are both operational and financial, and could perhaps have been spotted sooner. Previously high-volume contracts have been running down, leading to excess inventory. Receivables -- assets in the form of money owed -- were overvalued. This is a classic risk. 

Turner has moved a fellow non-exec, former Ford executive Anne Stevens, to interim CEO while a search gets underway for a new boss. She needs to fix the operational problems in the U.S. and finish a financial review of the business. Her career experience is encouraging.

But Turner needs to do more than find a new CEO; he should ask questions about how this happened. It's not clear whether internal reporting is substandard or if directors were insufficiently curious. It may be relevant that these difficulties emerged 4,000 miles from head office.

The debacle complicates potential plans for a breakup. GKN's marriage of aerospace and auto parts looks neither synergistic nor sustainable, hence frequent speculation that the group may split itself. It's hard for GKN to do that on its own terms right now. Recent missteps would prevent the aerospace division fetching a high price. Carving it out via a demerger would be tricky while it lacks credible management and hasn't fixed its issues.

After a 7 percent share price fall, GKN has an enterprise value of 5.5 billion pounds ($7.2 billion). That's just about small enough to be a breakup candidate for private equity. The management vacuum makes it vulnerable and the stock trades on a lowly 9 times forward earnings, versus peers with double-digit ratings. The deterrent to any bid is a 1.1 billion-pound U.K. pension deficit.

Further out, there are still plausible paths to separation. Maybe Phil Swash, head of the automotive unit, becomes CEO. He could bring in a new aerospace head to oversee the splits. Or an outside CEO could come in with the same plan, and put Swash in charge of a new autos company. But that won't happen overnight. A split depends on having two well-run standalone businesses, not one.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

©2017 Bloomberg L.P.

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