Margareta Pagano: engineer GKN’s rich history deserves long-term plans

Reading up on the story of GKN is like going on a virtual tour of the history of the industrial revolution. It’s one of Britain’s most successful engineering companies and its oldest, one that stretches back to 1759 with the founding of the Dowlais Iron works near Merthyr Tydfil in south Wales.

By the early 1800s, Dowlais was firing on all cylinders, literally. It supplied cannonballs to the Army to use against Napoleon and built up an ironworks employing 7300 staff manning 18 blast furnaces and producing 90,000 tons of iron a year.

It was the biggest manufacturing company in the world during the 1850s, when Dowlais was being run by the 40-year-old Lady Charlotte Guest, a mother of 10 children, after the death of her husband — the founder Sir John Guest.

Sir John — whose son Ivor was the G in Guest, Keen & Nettlefolds — worked with Brunel to make rails for the Great Western Railway as well as providing iron for the world’s first propeller-driven ship. GKN went on to make the steel for shells used in the First World War, the first wheels for the new motor industry and then Spitfires in the Second World War.

Today GKN makes parts for UK military tanks, the F-35 fighter jet, spar wings for the Airbus and the A400 aircraft carriers, as well as other sensitive defence contracts. Its GKN Driveline business is a world leader, with its parts used in every second car around the world, and has a £2 billion order book for e-drivelines for electric vehicles.

Shareholders, of course, are not a sentimental lot. They will not give a toss about GKN’s rich legacy when considering whether to accept the hostile £7.4 billion share and cash offer from the corporate raiders at Melrose. They only care about whether Melrose will raise its offer over the coming weeks to around 440p a share.

On one level, shareholders are right. Melrose, which has results out today, has pounced at a time when GKN, by its own admission, has underperformed over the past few years. Nor will investors care that Melrose is likely to strip GKN to the core, reduce R&D spending and split the company into two and either sell them or float one or other. Since its industry rivals are German, French and Spanish, these businesses are bound to end up in foreign hands.

More pertinently, with interest rates at zilch, Melrose is borrowing heavily to finance the bid so will be highly geared, a move which GKN says would be “reckless” and have an impact the pension fund. They also stand to gain personally — the four Melrose executives would make about £250 million if the bid succeeds.

Of course Melrose denies GKN’s claims of asset-stripping and short-termism. They claim R&D will not be cut, arguing they spend more than GKN does proportionately. They also say the business will not be heavily geared, and with the sale of Ergotron for £1bn, would reduce gearing by two thirds. Those with long memories will remember the promises made by Kraft when it gobbled up Cadbury.

With another redoubtable woman now in charge, Anne Stevens, GKN is firing again. In fact, Stevens sounds rather like the bidder — her Project Boost proposes to sell some of the low-hanging fruit, give shareholders back £2.5 billion and eventually split the business into automotive aerospace divisions increase value over the long-term. This makes sound commercial sense, and is not dissimilar to Melrose’s own plan. But will investors give Stevens the chance to put Boost into action? Or indeed, should the bid be blocked by Government because of national security concerns as well as fears for future research and jobs?

With only a small part of GKN’s business in the UK, and 6000 jobs based out of 58,000 worldwide, there do not appear to be strong grounds to do so although under the three “public interest” tests, the Government could block on national security grounds.

However, unless Theresa May has some sort of a French-style Danone yoghurt conversion — the French government stopped Danone claiming it was against the national interest — it does not look promising that she will stop the raiders despite lobbying from union leaders and MPs from all sides, as well as in the US.

So don’t hold your breath: GKN is certainly not holding out for this as part of its defence. Stevens wants to win by persuading investors they will make more in the long term by staying on board. There are some saving graces should Melrose persuade them otherwise. There are new safeguards under the Takeover code — Rule 24.2 — which state that the bidder must now articulate its intentions with respect to jobs, headquarters, research and other sensitive issues. They are non-binding and only valid for a year once the offer goes through.

There are also what are called post-offer undertakings, the promises used by Japan’s SoftBank when it bid for ARM Holdings, which are binding. But the undertakings could only be used if insisted upon by the GKN board — in the event of a recommendation.

Let’s hope that it doesn’t come to that. Shareholders should play the long game, and see GKN through this next industrial revolution.