GKN warns pension schemes could be threatened by Melrose's £7.4bn hostile bid

Lucy White
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GKN makes parts used by companies such as Boeing (Source: Getty)

Struggling engineering giant GKN has now turned to pension trustees as it attempts to fight a £7.4bn hostile takeover bid from turnaround firm Melrose.

GKN said its covenant – or the legal obligation and financial ability of the owners to support the pension schemes – could be adversely affected by the takeover, as Melrose expects the company's debt levels to be "materially higher" than their last standalone measurement.

Melrose is predicting GKN would be leveraged by around 2.5 times its earnings following the deal, compared to 0.6 times as measured last June.

Read more: GKN shares surge as it rejects a takeover offer and reveals it will split in two

"This may have implications for the covenant strength of the company, the level of the technical provisions deficit and therefore the level of immediate and/or long term cash funding requirements," GKN said in a statement.

The pension trustees earlier this month warned any potential bidders that they would be taking on a pension deficit of more than £1bn. They added that they may demand a new funding agreement for the schemes, if they thought a new owner might affect the strength of the covenant.

But Melrose was undeterred by the warning, saying that it was aware of the deficit and had "an impeccable track record of safeguarding and improving pensioners' rights".

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

It added in a statement today that the update from GKN "has no impact on our calculations and contains nothing that should concern GKN pensioners", and that it was "surprised" that the company had not mentioned a "voluntary cash contribution of up to £150 million" that Melrose had offered to make to the pension schemes.

The government has also turned its spotlight on the bid, as both parties have been called to meet with members of the Department for Business, Energy and Industrial Strategy. Ministers may intervene in a takeover which raises public interest concerns related to national security, financial stability or media plurality.

Both the UK and US governments are understood to be examining the deal through a national security lens, as the company makes components used in a number of military aircraft. It also manufactures parts for companies such as Boeing and Volkswagen.

Read more: National security concerns prompt government to scrutinise Melrose's hostile £7.4bn bid for GKN

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