March 7, 2019 / 8:00 AM / in 2 months

UPDATE 2-GKN deal boosts Melrose's profit, eases economy worries

* 2018 adjusted operating profit beats analyst forecast

* Analyst cheers GKN deal, lower debt/EBITDA ratio

* Company warns of challenging markets, especially autos

* Shares rise as much as 6 pct to top FTSE-100 (Adds Chairman, analyst comments, shares, background)

By Tanishaa Nadkar and Noor Zainab Hussain

March 7 (Reuters) - Melrose Industries’ hard-fought takeover of British engineer GKN helped to boost 2018 profits at the turnaround specialist and ease analyst concerns about its ability to cope with a slowing global economy and weaker autos markets.

Melrose shares rose as much as 6 percent in early Thursday trading to top Britain’s blue-chip FTSE-100 index.

The company narrowly clinched an 8 billion-pound ($10.5 billion) takeover of GKN in March last year, pulling off Britain’s biggest hostile bid since Kraft pounced on confectionery giant Cadbury in 2009.

Melrose, set up 16 years ago, focuses on turning around industrial companies and then finding new owners for them, following a strategy of “buy, improve, sell”.

The company reported adjusted operating profit excluding GKN’s loss-making contracts of 784 million pounds for last year, 5 percent ahead of JP Morgan estimates.

“The beat (was) despite the market’s concern on the end market development, notably in automotive, and speaks to the impact management actions are already having at GKN,” said JP Morgan analysts, who have an “overweight” rating on the stock.

Automakers, major customers of GKN, face a host of challenges including declining diesel vehicle sales, stricter regulations, investment in electric vehicles and Britain’s departure from the European Union, which could disrupt trade.

“Despite the current economically uncertain environment, we have every confidence that we will be able to continue to unlock the substantial shareholder value from the former GKN businesses,” Chairman Justin Dowley said in a statement.

Analysts also cheered a fall in Melrose’s ratio of net debt to core earnings to 2.3, beating the company’s guidance of 2.5.

GKN traces its roots back more than 250 years. It made cannonballs for the Duke of Wellington’s armies in the Napoleonic wars of the early nineteenth century and went on to produce Spitfire fight planes in the Second World War.

The modern GKN is made up of three main divisions: automotive, aerospace and powder metallurgy and supplies parts to carmakers such as Volkswagen and components to aircraft including the Eurofighter Typhoon.

Its takeover led to speculation Melrose could sell GKN’s aerospace business, which is involved in government defence programmes, to an overseas buyer. Reuters reported in October that Melrose was planning to sell the powder metallurgy unit.

Melrose, which has committed to a five-year ownership of the aerospace division, did not provide an update on any sales.

($1 = 0.7591 pounds)

Reporting by Tanishaa Nadkar in Bengaluru; Editing by Bernard Orr and Mark Potter

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