One of Britain’s oldest engineering firms is to be taken over by a company that has beenlabelled an “asset-stripper”, prompting calls for the government to block the £8.1bn deal on national security grounds.
GKN, which was founded in 1759 and has 59,000 staff including 6,000 in the UK, succumbed to a “hostile” bid from Melrose after a lengthy and sometimes acrimonious corporate tussle that has spilled over into the political arena.
Melrose, which buys underperforming firms to cut costs and sell on at a profit, appealed directly to GKN shareholders after the company’s board rejected two bids, narrowly winning their approval at a vote on Thursday afternoon.
Investors’ blessing for the takeover signals an end to the independence of a 269-year-old engineer that provided the iron for the construction of Britain’s railways and produced Spitfires during the second world war.
Business minister Greg Clark said he would consider calls from MPs and trade unions to intervene on national security grounds, given GKN’s role in making components for military aircraft including the Lockheed F-35B fighter jet.
Jack Dromey, the Labour MP who led a group of 16 politicians that wrote to Clark urging him to halt the deal, said the buyout of GKN by Melrose was a “bleak day for British industry”.
Liberal Democrat leader Vince Cable called for takeover rules to be strengthened to prevent “short-term speculators” snapping up shares in buyout targets in order to vote for a deal and pocket the profits.
The acquisition of GKN, which began life as an ironworks near Merthyr Tydfil in 1759, is the largest hostile takeover in the UK since US firm Kraft bought Cadbury in 2010.
That deal led to Cable, then business minister, calling for a “Cadbury law” to stop hedge funds and other short-term investors influencing takeovers.
Christopher Miller, the chairman of Melrose, said he was “delighted and grateful” after narrowly winning the shareholder vote with 52.4% of investor support, just above the required 50.1% threshold.
GKN is a global engineering business based in Redditch, Worcestershire. It employs nearly 60,000 people across 30 countries.
Once known as Guest, Keen and Nettlefolds, the firm can trace its origins back to 1759 and the birth of the Industrial Revolution in Britain.
Split into three key divisions – GKN Aerospace, GKN Driveline and GKN Powder Metallurgy – the multinational designs, manufactures and services systems and components for most of the world’s leading aircraft, vehicle and machinery makers.
In 2017 it recorded pre-tax profits of £572m.
Melrose has consistently denied that its model of buying up businesses to sell on amounts to asset-stripping.
It has made legally binding promises to keep GKN’s UK headquarters and retain a British workforce, maintain research and development spending and refrain from selling its aerospace business for at least five years.
“Let me assure you that GKN is entering into very good hands,” said Miller, a protege of Lord Hanson, the 1980s wheeler dealer who built a corporate empire with a number of aggressive takeovers.
GKN’s directors said on Thursday that it still believes that the deal “fundamentally undervalues” the company but that it now had no choice but to recommend investors sell their shares.
Dromey said the government should not allow Melrose to complete the takeover.
He said: “Today is a bleak day for British industry. The takeover by Melrose makes a mockery of any talk by government of an industrial strategy.
“Britain’s takeover rules are in desperate need of reform. Yet again, as in the Kraft takeover of Cadbury’s, we have seen a jewel in the crown of British industry sold off because its shares were bought up by hedge funds.”
Dromey said the deal would not have gone through if the previous coalition government had agreed to Labour’s calls to restrict investors from voting on acquisitions unless they had held shares for six months.
The proposal was designed to prevent short-term speculators such as hedge funds buying up shares with the aim of influencing takeover outcomes for profit.
“To let a 259-year-old British engineering icon like GKN be taken over by a short-termistasset-stripper like Melrose is a monumental failure by ministers,” said Dromey.
“However, the government still has the power to intervene to block the hostile takeover takeover on defence and national security grounds. It should do so in the British national interest.”
GKN began as the Dowlais Ironworks Co in south Wales in 1759. By the mid-19th century it had become the largest ironworks in the world, producing almost 90,000 tonnes of iron a year.
A reverse takeover pushed through by entrepreneur Arthur Keen created Guest, Keen & Co. Two years later, Keen drove through the takeover of a reluctant Nettlefolds Ltd and the enlarged company became Guest, Keen & Nettlefolds. It was the largest iron, steel and coal group in the country.
During the first half of the 20th century GKN became heavily involved in wartime production, while also making its first move into the emerging motor industry. It produced Spitfires, a specialised tank for the D-day landings and millions of steel helmets.
GKN emerged from the second world war as Britain’s biggest steel producer but was virtually bankrupt.
Faced with the Labour government’s drive to nationalise the steel industry, GKN gradually withdrew from steel over the next 20 years. It pushed into the automotive industry.
The group made the first loss in its history; it soon expanded globally. In 1988 it acquired a stake in Westland, the British helicopter and aerospace manufacturer, and moved into aerospace technology.
GKN focused on four businesses: aerospace, Driveline, powder metallurgy and land systems. It was relegated from the FTSE 100 index.
GKN issued a series of profit warnings after writedowns at its North American aerospace division and its chief executive designate Kevin Cummings was ousted.
12 January 2018
Melrose made a hostile £7bn cash-and-shares takeover bid, upped to £8bn in March. Non-executive director Anne Stevens, a former Ford executive, became GKN’s new CEO.
GKN struck a $6.1bn (£4.4bn) deal on 9 March to merge its automotive business with the US firm Dana in an attempt to fend off the Melrose bid.
Shareholders have to decide whether to accept or reject the bid by 1pm on 29 March. Melrose needs 50% plus one share support.
Cable said: “The very narrow result – like Brexit – suggests that this takeover is not universally popular amongst shareholders. It seems it was only secured through votes from short-term speculators.”
Elliott Advisors, an “activist” investor with a history of intervening in takeovers, built up a 3.8% stake in GKN before the deal, which it urged fellow shareholders to back a week ago.
Cable called for the government to change corporate takeover rules to curb the voting power of short-term investors. He added that ministers should also be able to intervene in takeovers that might affect investment in research and development.
Clark said: “During the bid, Melrose made commitments which they are bound to honourincluding investment in research and development and maintaining itself as a UK business.
“Now that shareholders have made their decision the government has a statutory responsibility to consider whether the merger in its proposed final form gives rise to public interest concerns in the areas of media plurality, financial stability and national security.
“This assessment will be made by the appropriate authorities and the conclusion set out in due course”.
Trade union Unite echoed Cable’s concerns and said it would be “holding Melrose’s feet to the fire” to honour its commitments to GKN but said the government should still consider blocking the deal.
Unite’s assistant general secretary for aerospace, Steve Turner, said: “This takeover has put into stark relief the inadequacy of the UK’s takeover rules which put the interests of short-term speculators over those of the workforce and long-term investors.
“We need an overhaul of UK takeover laws to strengthen the voice of stakeholders to ensure other British companies do not fall prey to corporate vultures looking to make a quick buck against the national interest.”
During a two-month takeover battle, Melrose repeatedly accused GKN bosses of mismanaging the company, while opponents of the deal warned that Melrose would carve up the business and prioritise short-term profits over long-term success.
Melrose told the Guardian that many executives within GKN had privately expressed support for the takeover. “There have been back-channels from within GKN indicating they’d welcome a new broom. We think a lot of people within GKN are really going to welcome Melrose coming in.”
Melrose typically rewards senior staff with large financial incentives if they succeed in cutting costs to extract maximum value out of businesses it can then sell on.
The deal is the largest hostile takeover launched in the UK since Kraft swooped on Cadbury in 2009 and has attracted public scrutiny from politicians and unions, as well as investors. Earlier this month, GKN’s largest customer, Airbus, said it would take its business elsewhere if the Melrose deal went ahead.
Melrose first expressed interest in buying GKN in January. Subsequently GKN’s management revealed plans to merge its automotive business with the US firm Dana, in an attempt to fend off the hostile approach.