Activist investor Elliott urges fellow GKN shareholders to accept Melrose’s £8.1bn hostile takeover
Activist hedge fund Elliott Advisors has announced it will support Melrose’s hostile £8.1bn bid for engineering giant GKN.
Elliott, which has a 3.84 per cent stake in GKN and is now its second largest shareholder, urged fellow shareholders to accept Melrose’s controversial offer.
The investor also sent a letter to GKN’s board, saying it was “sceptical of the company’s ability to deliver on Project Boost for its aerospace business”.
Read more: Activist hedge fund Elliott reveals it owns a stake in GKN as the company battles a £7bn takeover bid
“GKN’s track-record at improving its operating margins has been unimpressive, yet your team nevertheless claims that it can deliver on its most ambitious plan ever, and that a few potentially qualified individuals can extract the company from its torpor to deliver over a 35 per cent increase in profitability – an achievement unheard of in GKN’s recent history,” the hedge fund wrote.
“Our belief is that this would require management’s full attention to implement profound cultural and structural shifts throughout the business, while at the same time both getting the driveline disposal over the finish line and running an efficient full-blown auction process for the powder metallurgy business.”
Read more: Major GKN investor Jupiter joins Airbus in opposing Melrose’s hostile bid
Part of GKN’s defence to Melrose’s bid has been to announce a merger of its driveline business with US-based Dana, and to announce a “Project Boost” overhaul of the rest of the business which would involve flogging off non-core branches such as powder metallurgy.
“A natural and often observed phenomenon in the face of unsolicited approaches is the ability for incumbent management teams to come up with highly attractive plans for the future of their company, which shareholders would have disregarded as pure fantasy had they been presented in the company’s normal course of action,” Elliott wrote cynically.
“Unfortunately, more often than not, once the dust settles and the pressure falls away, shareholders that decided to entrust management with their capital for another several years have to face the disappointing reality which becomes rapidly reflected in the declining value of their shares.”
GKN’s customers fight back
Despite Elliott’s strong words in support of Melrose, a number of GKN’s customers have followed Airbus’s suit and rallied behind the engineering giant’s board.
“GKN Driveline is the only supplier of meaningful scale in the UK supply chain, and we therefore have a very major interest in ensuring that it continues to flourish,” said a senior executive in one of GKN’s largest European auto customers.
We want reliable partners who are in our business for the long term. We are therefore much more comfortable with a long-term, well-respected industry investor like Dana than someone with a private equity-style buy-and-sell approach whose short-term outlook will influence our purchasing decisions.
Meanwhile, an original equipment manufacturer which is one of GKN’s largest driveline customers added:
“Automotive requires long-term planning and commitment, so our strong preference is to deal at tier 1 level with long-term, committed industrial owners and managers who understand the industry, particularly with the fundamental shift to electrification which is now taking place.
“We would have real concerns about an inexperienced, financial owner that doesn’t share our long-term horizon.”
An analyst’s take
Though a number of GKN shareholders have come out either for or against the Melrose bid in recent days, Deutsche Bank’s Jonathan Hurn and Gael de-Bray said in a note today that the battle was “too close to call”.
So far, they calculated, institutional investors representing around nine per cent of GKN have backed the company’s management while seven per cent have supported Melrose.
The analysts estimated that a successful Melrose bid could potentially deliver greater value to shareholders.
“The results of our scenario analysis are that there is greater shareholder value creation from here, in our view, from Melrose acquiring GKN providing they can deliver the margin improvement (which we think they can),” Hurn and de-Bray wrote.
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