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GKN - well do you trust us? Do ya?

By Chris Bailey | Wednesday 14 February 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.

Time for an update on the tussle surrounding one of the UK's last industrial behemoths. Regular readers will recall I got a bit lucky with one of my tips of the year a month or so ago as GKN (GKN) picked up a bid from business takeover specialist Melrose (MRO). I guess it was inevitable that a newly appointed CEO - albeit one who is pushing close to a classic retirement age - who got the job to help turn the struggling business around would agitate rather than roll over. At the turn of the month GKN was minded to tell its shareholders that:

'Melrose’s stated premium of approximately 28% over the closing share price of GKN on 5 January 2018 is a fake premium and is misleading. Melrose is proposing to fund over 80% of the offer consideration in shares and GKN’s shareholders are themselves funding the majority of the premium. In addition, GKN’s strong balance sheet is effectively funding the vast majority of the 81 pence per share in cash. Melrose is not the right owner for GKN. It lacks experience in relevant high technology businesses and of investing for the long-term. GKN is a much larger and more complex business than anything acquired by Melrose in the past. In addition, Melrose has very limited experience at Board level of managing Tier 1 Aerospace and Automotive suppliers.'

Double ouch! Given this and the generalised market volatility, GKN shares have pulled back from the post-bid frenzy highs of c. 440p and are now at around 400p - still very pleasantly up from the c. 320p level at which they started the year. And earlier today we received the GKN push back boringly titled as its 'Strategy and transformation plan'.

So what did this dully headlined update include? Well the key points are not wholly dis-similar to the Melrose plan (quelle surprise) and include:
1. Operational separation of the Aerospace and (automotive) Driveline divisions (this has already begun);
2. Cost cutting via 'Project Boost' (where do they get these names?!) which is aiming to 'deliver a recurring annual cash benefit of £340m from the end of 2020/1';
3. The sale of the Powder Metallurgy business which will be a significant contributor to returning up to £2.5 billion (just over a third of the market cap but less of the pension deficit adjusted EV) to shareholders over the next three years.

In short: simplify, cost cut and return raised/generated cash to shareholders. All pretty classic and - as I said before - not wildly dis-similar to what Melrose would have done shorter-term (longer-term Melrose would of course sell off all the constituent parts in my view).

Given a fair wind there is certainly 400p+ worth of value in GKN but with the management of the company not playing ball with Melrose either the latter are going to have to pucker up more or you have to trust the above plan to deliver. As I said before it is a pretty classic/straightforward one and ultimately you know that if the newish GKN management bog it up then a bidder for all or part of their empire will come in. Either way, as I said in the linked piece above, I am in the stock for the medium haul consistent with 'stock of the year' ethics. I am not fussed though: this one is in play and by early next decade it is going to look very different - and I don't even think investors who enter here will be disappointed.

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