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GKN - a January bid for a 'tip of the year'!

By Chris Bailey | Friday 12 January 2018


Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


Well, well, well. Just when you thought that you have seen it all...the stock market can continue to surprise.

As regular readers know I am the prudent large cap writer on this website. I stand in awe as you are served up exposes, intrigue, insights and drama from the smaller cap scene by many of the other writers, whilst I just plod along trying to spot a bit of (typically) FTSE-100 large cap value. Elephants may not gallop...but sometimes they can trot a lot faster than you think (and don't let anyone ever tell you that large caps are efficiently priced). So back in late December no surprises that the two tips of the year that I served up were of a larger cap nature. One of them was GKN (GKN) ...and stone the crows it has been bid for today...by another larger cap name, superior business value creator Melrose (MRO):

'The Board confirms that on 8 January 2018 it received a preliminary and unsolicited proposal from Melrose to acquire the entire issued and to be issued share capital of GKN at a price of 405 pence per share, comprising 80% in new Melrose shares and 20% in cash (the “Proposal”). Using the closing share price of Melrose of 218 pence as of 5 January (the business day prior to receipt of the Proposal) the Proposal implied an exchange ratio of 1.49 new Melrose shares for each issued and to be issued GKN share (which would result in GKN shareholders holding approximately 57% of the enlarged company and Melrose shareholders holding 43%) plus 81 pence in cash per GKN share'

You can guess what GKN - which also announced today that its interim CEO will go permanent, trading is in-line, transformation chat to improve business performance is ongoing (good) and (almost as good as the bid and as requested in my tips piece) it is intending to separate the key business divisions... 'The Board intends to separate the businesses, recognising the strategic optionality for shareholders in having separate companies with distinct investment profiles and capital allocation policies. The Board will communicate further details on the optimal method of separation in due course. The timing of the separation will be determined by the need to maximise the economic benefits and minimise the costs associated with separation'

...said about the Melrose bid: it undervalues the company!

It may well be correct there...but there's also a reason why GKN shares have not pushed above the 400p level in the last 12 years. Melrose's hard-nosed but sensible management expertise is just what this company needs...and I am sure item one on their agenda would be to look to split the company up. At least GKN's wounded incumbent management have got that right.

It is early days but the reason why GKN stock is trading up 25%, above the flash implied value of the Melrose bid, is that it is now in play...and doing sensible stuff. By all means if you have it take a few profits as nothing is guaranteed but the tip of the year Gods have me locked down for the full twelve months. I am not too worried...it could have been a profit warning instead. Now that would have been embarrassing...


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