GKN Offers Investors $3.5 Billion in Cash to Rebuff Melrose

(Bloomberg) -- GKN Plc sharpened its argument against a hostile takeover attempt by Melrose Industries Plc, outlining plans to divest businesses representing a quarter of its sales, slash costs and return 2.5 billion pounds ($3.5 billion) in cash to shareholders over the next three years.

The U.K. company will sell its powder metallurgy business and several smaller operations, and has begun to operate its automotive and aerospace parts businesses independently before considering a formal separation “when it makes sense,” GKN said in a statement Wednesday. The revamped management team, led by Chief Executive Officer Anne Stevens, promises to boost profit margins and pay out an average of 50 percent of its free cash flow in dividends over the next three years.

GKN Offers Investors $3.5 Billion in Cash to Rebuff Melrose

The moves are aimed at proving to shareholders that the company, a major supplier to Airbus SE and Boeing Co., is better off staying independent than succumbing to the 7.26 billion-pound Melrose offer, the largest hostile takeover attempt in the U.K. in a decade. GKN is set to outline the plan in meetings Wednesday with shareholders, who received a formal offer from Melrose this month.

“None of this is rocket science and trust me, I know rocket science,” Stevens, who took over as CEO in January, said on a conference call. GKN is a longtime supplier to the European Ariane rocket program.

Management Crisis

Melrose, a takeover specialist that focuses on turnarounds, pounced after GKN was reeling from a management crisis triggered by inventory issues at its U.S. aerostructures business. Stevens was first appointed as an interim replacement for Kevin Cummings, who was fired two months after being selected as the CEO in-waiting. GKN, which like other aerospace suppliers is being squeezed by the Boeing-Airbus duopoly, had to book a 112 million-pound charge after a balance-sheet review of the U.S. unit that he led.

As part of its Project Boost turnaround program, GKN said Wednesday that it will strip out non-core products over the next 12 to 18 months, possibly selling the standard aerostructures business in Alabama and St. Louis.

In addition to the metallurgy arm, GKN will dispose of its wheels, cylinder liners and off-highway powertrain units as well, while improving its businesses supplying parts to aero engines and automakers in China. In total, these assets account for 26 percent of revenue, executives said today on a conference call.

“Too often we pursued growth at the expense of returns,” Stevens said in the statement. “This will no longer be the case.”

Hostile Tone

The battle for control of GKN has taken on an acrimonious tone. It marks the biggest hostile bid for a U.K. company since 2009, when Kraft Foods Inc. proposed acquiring Cadbury Plc, according to data compiled by Bloomberg. Stevens has accused the unwanted suitor of offering shareholders a “fake premium” and misrepresenting its plans.

For all the animosity, the rival pitches to shareholders are similar. Melrose also plans to sell the powder metallurgy business, but has said it would keep the company intact while it improves margins before considering a sale. The buyout firm has said it would restructure GKN’s head office, implement new management teams and refocus the engineer on profits and away from growth.

The GKN plan announced Wednesday “likely will not end the debate about who would better execute it,” Sandy Morris, an analyst with Jefferies in London, said in a research note.

GKN was up 0.5 percent to 399.80 pence at 9:52 a.m. in London. The shares have advanced 25 percent this year, giving the company a market value of 6.7 billion pounds.

As part of Project Boost, GKN is targeting a group margin of 10.5 percent, up from 7.4 percent last year, and a jump in free cash flow of 340 million pounds per year starting in 2021. The company will also reduce layers of management while implementing a program of up to 70 million pounds in incentive payments.

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