LONDON (Reuters) - GKN rejected as “entirely opportunistic” a 7 billion-pound takeover offer from turnaround specialist Melrose and set out plans to split its business in two, sending shares in the British engineering firm soaring 30 percent on Friday.
GKN, whose roots date back to the 18th century, makes parts for the Boeing 737 jet, Black Hawk helicopter and components for Volkswagen and Ford cars. It was valued at 5.7 billion pounds at the market close on Thursday, having recently suffered from problems at its aerospace division.
Investors have been calling for GKN to split its businesses as management persistently failed to meet targets to improve profit and cash flow despite growing sales. Those calls became louder after a profit warning in October, which was sparked by the difficulties at its aerospace business.
Melrose said on Friday it could significantly improve the performance of both GKN’s aerospace and engineering divisions, maximising value for shareholders before any split.
The share-and-cash offer, tabled on January 8, valued GKN at 405 pence ($5.48) per share at that time, a 24 percent premium to the closing price the day before.
GKN’s share price jumped as much as 30 percent to 433.9 pence in Friday while Melrose gained 5 percent - raising the value of its bid to 415 pence or 7.1 billion pounds.
In rejecting the bid, GKN said it would separate its aerospace and automotive divisions to improve profitability. It also named former Ford executive Anne Stevens as CEO, a role she has held on an interim basis since January 1.
A second large writedown at the aerospace division in November saw the departure of CEO-designate Kevin Cummings, the head of the aerospace division who had been set to take over the top job this month. [nL8N1NM1QS]
GKN’s board dismissed the offer from Melrose in a unanimous decision. It said the offer was “entirely opportunistic” and “fundamentally undervalues the company and its prospects”.
“Fundamentally it’s got good market positions. What it hasn’t done is generate enough cash from those market positions,” one person familiar with the company said.
One shareholder in Melrose, who also previously used to own stock in GKN, said “good assets, bad management” had long been the story at GKN.
Stevens, who at 69 has extensive experience in the aerospace and automotive sectors, said she would instill a much stronger performance and accountability culture at the group, which employs 58,000 people across 30 countries.
“GKN is a world leader with the potential to perform even better,” she said. “I am relishing the challenge of delivering that potential with a new group-wide improvement programme underway.”
GKN said each business would have distinct investment profiles and capital allocation policies.
While that plan does not yet entail a full separate listing, it could make one possible in the future.
“The board will communicate further details on the optimal method of separation in due course,” it said.
The split is likely to trigger bid interest in both businesses, bankers said.
Market sources suggested companies such as Spirit AeroSystems or Triumph Group could be suitors for GKN’s aerospace business.
Melrose, valued at 4.16 billion pounds ($5.7 billion) at the close on Thursday, specialises in buying companies that it can improve through investment and cost cuts with the aim of selling them at a profit.
Involving paper in its GKN bid is a departure from its usual strategy of raising funds for acquisition through rights issues.
As of Thursday’s close GKN shares had fallen 0.7 percent in the last 12 months. It carried net debt of around 700 million pounds as of June 30, 2017.
Gleacher Shacklock, JP Morgan Cazenove and UBS are advising GKN and Melrose is working with bankers from Rothschild, RBC Capital Markets and Investec.
Writing by Paul Sandle; Editing by Jason Neely and Elaine Hardcastle