U.K. Wades Into GKN Battleground With Questions for Melrose

(Bloomberg) -- Melrose Industries Plc offered to keep GKN Plc’s aerospace operations for at least five years should its $11 billion hostile takeover offer succeed, after the U.K. government questioned its long-term commitment to the engineering group.

Melrose will provide a legally binding guarantee preventing it from offloading the division, which includes politically sensitive defense activities, until April 1, 2023, Chief Executive Officer Simon Peckham said Tuesday in a letter to Business Secretary Greg Clark.

The U.K. turnaround specialist issued the pledge after Clark wrote to Peckham on Monday saying GKN’s defense exposure required a “long-term approach” which might not be compatible with Melrose’s business model. With a Thursday deadline looming for investors to decide between competing proposals for GKN, the government also sought guarantees on its U.K. headquarters, workforce, investment, tax status, pensions and relationship with suppliers.

“I thought it was necessary for them to set what out their intentions were, in terms of the period of ownership for aerospace specifically,” Clark told members of Parliament on Tuesday. “Without this we would have been in the dark.”

The government’s eleventh-hour intervention adds another dimension to the takeover tussle, which has seen Melrose pitch its strategy of boosting margins at both the aerospace and automotive units before any sale. It has painted its plan as more considered than Redditch, England-based GKN’s own proposal for an immediate breakup, which would leave current management in control of the remaining aerospace group.

Politicians and labor groups have said that they doubt Melrose’s expertise and portrayed it as an asset-stripper in disguise. Manufacturer Airbus SE has also warned that it may not continue as a customer. The Unite trade union added to those voices Tuesday with a statement urging shareholders to reject the takeover, saying that the autos sector requires five to eight years to bring a product to market, extending to as many as 15 years in aerospace -- timescales “not compatible” with the Melrose approach.

In Parliament, Clark was asked to block a Melrose takeover on national security grounds. He said he’d decide on that question only after hearing advice from military experts.

National Security

“The Ministry of Defense will make an assessment on whether or not there are grounds for intervention” based on the U.K.’s national security interest, Clark said. “I will make a decision on that basis once the bid is closed.”

Melrose repeated earlier assurances on GKN’s headquarters and jobs, and also increased its commitment to funding research and development at the company by 10 million pounds ($14 million) while saying that the automotive division’s innovation center will become a focus for electric driveline technology. GKN’s plan to sell the auto unit to U.S.-based Dana Inc. would have no such benefit for Britain, Peckham said.

The conflict between GKN and the Birmingham-based Melrose, the largest U.K.-only hostile-takeover battle in a decade, has led to an almost daily exchange of press statements from both sides. Dana on Monday increased the cash portion of its $6.1 billion bid for GKN’s Driveline unit by 100 million pounds. The U.S. firm said Tuesday that it’s offering superior value with a greater upside and lower execution risk.

Shares of GKN rose as much as 2 percent and were trading 0.6 percent higher at 434.20 pence as of 3:49 p.m. in London. The company’s market value is 7.5 billion pounds, about 10 percent below the 8.3 billion-pound Melrose offer.

©2018 Bloomberg L.P.

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