GKN Pledges to Remain a Force in Aerospace After Proposed Split

(Bloomberg) -- Takeover target GKN Plc sought to reassure investors that it will remain a major force in aviation and grow through acquisitions after a proposed breakup that could wipe out more than two-thirds of revenue.

The U.K. engineer will spend three years restructuring ailing aerospace plants if it repels hostile bidder Melrose Industries Plc by a March 29 deadline, Chief Financial Officer Jos Sclater said in an interview. Those improvements, following the planned sale of its automotive arm, should position GKN to start snapping up smaller firms to build the aviation business, he said.

“There’s still plenty of opportunity to be the consolidator once we prove that we can run these factories super-efficiently, and that we can deliver margin improvement,” Sclater said. “We need a couple years of just delivering our numbers and never missing a beat. Then we’ll be back in the game.”

GKN has agreed to sell an auto transmissions business to Dana Inc. in a $6.1 billion deal that would reduce revenue by more than half, while also planning to dispose of a powder metallurgy unit and parts of a U.S. aerostructures business. Even then it would be larger than other major European aerospace suppliers such as Meggitt Plc, Cobham Plc and Senior Plc, Sclater said.

“We’ll still be one of the bigger ones,” said the CFO. GKN will have revenue of about 3 billion pounds should it progress with all of its counter disposals, according to Bloomberg calculations based on 2017 figures.

By contrast, the much larger Driveline arm is a relative “minnow” in the autos sector when compared with players such as Schaeffler AG, Continental AG and Magna International Inc., Sclater said.

Melrose has proposed a takeover worth about 8 billion pounds ($11 billion), after which it would aim to improve margins at both the aerospace and automotive units before contemplating a breakup. The company has dismissed GKN’s plan for a more immediate split as a knee-jerk response that would fail to deliver full value to shareholders.

Redditch, England-based GKN is also reaching the end of price-reduction commitments made to Boeing Co. and Airbus SE, Sclater said. It has already negotiated the dropping of “continuous improvement” clauses that have weighed on earnings and helped trigger a crisis at North American aerospace plants which cut corners in order to deliver required gains.

‘Hammering Suppliers’

The U.K. company doesn’t see aerospace suppliers submitting to such punitive deals from planemakers when striking future contracts, Sclater said. Cost overruns have weighed on suppliers spanning engine maker Pratt & Whitney to seat maker Zodiac SA and GKN rivals Spirit AeroSystems Holdings Inc. and Triumph Group Inc.

“I’m sure they’ll be back, but how successful they’ll be in this continuing hammering of their suppliers is quite debatable,” the executive said. “I get the sense that the supply chain is getting to the point where enough’s enough.”

Sclater said GKN may sell around two-thirds of its aerostructures sites in the U.S. but will keep plants in Alabama and South Carolina specializing in more advanced, higher-margin processes. The wider aerospace business -- the whole company under GKN’s plans -- isn’t for sale, he said, adding that a company such as Spirit Aero wouldn’t have the balance sheet to bankroll such a deal.

To contact the reporter on this story: Benjamin Katz in London at bkatz38@bloomberg.net.

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Christopher Jasper

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