GKN pension trustees warn potential suitors including Melrose of a more than £1bn black hole

 
Lucy White
New Audi A3 Production
GKN, which makes components for vehicles, thinks its own turnaround plan is better for shareholders (Source: Getty)

The trustees of GKN's pension scheme have warned that any buyer of the engineering giant would face a pension deficit of more than £1bn.

GKN is currently fighting off a bid from restructuring firm Melrose, as other suitors including buyout house Carlyle are rumoured to be circling.

But the company's pension trustees today warned that the scheme has an aggregate deficit of £1.1bn on a "gilts flat" basis – a measure for if the schemes were invested entirely in government bonds – or £1.9bn on a solvency basis, which is judged in relation to the cost of getting an insurer to buy out the liabilities.

Read more: Activist hedge fund Elliott reveals it owns a stake in GKN as the company battles a £7bn bid

"The trustees expect full engagement with management and with any relevant third parties, at the appropriate time, to ensure satisfactory protection and mitigation for any impacts arising from any change in the strategic direction or future ownership of the company," said a spokesperson for the trustees in a statement.

The trustees added that any takeover may have to involve a new funding agreement for the pension schemes, if it thought the strength of the covenant – or the new owner's legal obligation and financial ability to support the schemes – had changed.

Melrose however appeared undeterred. "The numbers published today by the trustees are entirely in line with our own reading of the pension exposure at GKN," a spokesperson said.

"Melrose has an impeccable track record of safeguarding and improving pensioners rights in every acquisition we have made."

GKN rejected a takeover approach from Melrose last week, which valued the business at £7bn. GKN, which manufactures parts for Volkswagen and Boeing, said the bid was "opportunistic" and "fundamentally" undervalued the company.

However it seems that Melrose, which specialises in buying industrial companies before improving them and selling them off, will be pursuing the bid as it met with shareholders on Monday.

It emerged yesterday that activist hedge fund Elliott, which attempted to push Dulux maker AkzoNobel to accept a takeover offer last year, had grabbed a stake in GKN shortly after news of Melrose's approach emerged.

Read more: Melrose meets with GKN shareholders to pursue £7bn bid, as interest from buyout house Carlyle could prompt a bidding war

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