It would be an exaggeration to say GKN’s shareholders, after being blasted by management presentations for the past week, have suddenly fallen in love with their misfiring engineering giant. But something may be stirring.
For almost the first time since Melrose launched its £7bn reverse takeover bid, GKN’s shares are trading consistently above the value of the offer. GKN closed on Thursday at 435p versus an offer, which is mostly in the form of Melrose shares, worth 413p. And that was before the FT’s report on Thursday night that GKN is talking to US group Dana about a deal to sell or combine its automotive division. The gap isn’t huge, but the position is more encouraging for GKN than a fortnight ago.
Back then, it was too easy for Melrose to portray GKN’s chief executive, Anne Stevens, as a semi-retired recruit hauled from the non-executive benches and who could make only vague promises about corporate self-improvement.
GKN’s big plan, called Project Boost, does still require investors to take a lot on trust. But there were clear long-term cashflow forecasts in the mix, a promise to return £2.5bn to shareholders plus a firm commitment to demerge the two halves of the company – aerospace and automotive – by the middle of next year.
A demerger in itself should add no value. In practice, the move would address the old complaint that the stock market awards the lower rating - in this case, an automotive one - to any engineering group that serves two markets. Life shouldn’t work that way, but sometimes does.
Project Boost won’t convince everybody, but it prompted Jefferies’ analyst, for example, to place a valuation range of 448p to 523p on GKN’s stock. At the very least, it is probably safe to assume, even if Melrose were to walk away tomorrow, that GKN’s shares wouldn’t tumble all the way back to their pre-action level of 326p. A price around 370p or 380p might be more like it.
Viewed that way, Melrose’s current offer worth 413p looks outright mean. The real takeover premium is miserable.
Yes, as the bidder keeps saying, one can view share-based takeover offers as a debate about which management team to prefer. On that score, Melrose’s record of enriching investors still puts it ahead in City eyes. But takeovers are also about fundamental value. In this case, all that has really happened is that Melrose has spotted an undervalued business and is offering lowball terms to own it. The 57% share of the pie that would go to GKN shareholders is short by several slices.
The business select committee will hear from both sets of management next Tuesday. Melrose’s crew, presumably, will be quizzed about asset-stripping, debt, pensions and the rest of it. And, if they’re being fair, MPs will also give Stevens a hard time over whether her demerger plan for GKN is any less dangerous to the long-term interests of UK manufacturing.
In the absence of a wider public interest test on takeovers that Theresa May has failed to deliver, that encounter is important. MPs may be able to extract a few long-term promises from Melrose about investment in research and development in the UK that can be turned into binding commitments by the Takeover Panel.
But there’s also the here-and-now question of value. That one seems straightforward. GKN’s defence is hopeful, but not wildly so. As things stand, Melrose isn’t offering enough. Nothing like.
Zero-based budgeters
It was not a pretty year, says Sir Martin Sorrell. He wasn’t talking about his pay packet - which will probably still count as beautiful by conventional standards - but about the advertising giant WPP’s results for 2017. He’s right. Everything from revenues to profits to margins went roughly flat.
The intriguing part, however, was Sorrell’s explanation. He said it had little to do with attempts by Google and Facebook to cut out agencies by luring advertisers directly to their doors. Instead, he blamed cost-cutting by big multinationals under siege from “zero-based budgeters, activist investors and private equity”.
The latter phenomenon is clearly genuine. Unilever, Nestle and Procter & Gamble, in various ways, are under pressure from investors to boost profit margins. Trimming perceived fat from advertising budgets is an easy short-term win, even if Sorrell thinks it is self-defeating in the long-term.
Yet he should surely be more cynical about the ambitions of Google and Facebook and their digital co-travellers, consultancies. A large chunk of his presentation was devoted to reasons for the technology giants not wanting to “disintermediate” advertising agencies and see them instead as partners. He even offered supporting quotes.
Good luck. Once upon a time, executives in other corners of the media world have also trusted the friendly talk. The plot didn’t usually work out happily for the old guard.
