(Reuters) - A sharp rise in both companies’ share prices shows the merit of Melrose’s (MRON.L) bid for engineer GKN (GKN.L), the turnaround specialist said on Thursday, seeking to win over GKN investors to its hostile 7.4 billion pound ($10.3 billion) offer.
Melrose was responding on Thursday to earlier criticism of its cash-and-shares offer from the much larger GKN, a British firm that makes parts for the Boeing 737 jet, Black Hawk helicopter and components for Volkswagen and Ford cars.
GKN, which traces its roots back to the 18th century, said Melrose’s claim to be offering its shareholders a 32 percent premium was “fake”, not least because most of the cash for the proposed deal would effectively be funded by GKN investors.
With a much higher debt-to-core earnings ratio, Melrose would be using GKN to leverage up the combined business to fund the cash part of its offer, GKN said.
GKN, which has set out an alternative plan to split itself into separate aerospace and automotive businesses, said the real premium being offered by Melrose was less than 11 percent.
Melrose, however, defended its takeover plan.
“In less than a week shareholders have seen 104 pence per share or 1.8 billion pounds added to the value of GKN which shareholders can, if they wish, realise today in the market,” Melrose Chief Executive Simon Peckham said in a statement.
“Melrose’s actions have done that, not GKN’s management”, Peckham added.
Melrose pounced on GKN after problems at the engineer’s aerospace division led to profit warnings in October and November, sparking a sharp share price fall.
Its offer of 1.49 new Melrose shares and 81 pence in cash for each GKN share is currently worth around 431 pence per GKN share. GKN shares closed at 445 pence on Thursday.
Melrose’s bid is one of the biggest hostile takeover attempts in Britain since Kraft bought chocolate maker Cadbury in 2009. Pfizer’s attempt to buy AstraZeneca in 2014 and Kraft Heinz’s tilt at Unilever last year were both abandoned after successful defense plans were put up by the target companies.
Melrose, whose business model is to buy engineering companies, improve their margins and resell them, already owns diversified firm Nortek and the Brush electricity generating equipment businesses.
GKN said on Thursday that Melrose’s board had “very limited experience ... of managing Tier 1 aerospace and automotive suppliers.”
“GKN is more than five times larger than any of Melrose’s prior acquisitions by revenue,” GKN chief executive Anne Stevens said in a statement.
GKN also refuted Melrose’s suggestion that it was rushing into a break up, saying the timing of the separation “will be determined by the need to maximize the economic benefits and minimize the costs associated with separation”.
A source familiar with the situation said earlier this week that Elliott Advisors, which has a small interest in GKN, thinks it should open talks with Melrose, though the fund considers the existing offer unattractive.
A regulatory filing on Thursday showed Elliott cut its interest in GKN to 0.5 percent after Melrose went hostile with its bid on Wednesday, from the previously disclosed 1.7 percent.
Another fund, Vulcan, has also trimmed its interest in GKN to 3.9 percent from 4.1 percent, a separate filing showed. The Financial Times reported on Monday that Vulcan wanted GKN to hold discussions with its suitor.
Melrose bought engineering firm Elster for 1.8 billion pounds in 2012, selling it to Honeywell Inc for 3.3 billion pounds three years later. It returned 2.4 billion pounds to shareholders in 2016.
Melrose has some experience of aerospace businesses after buying McKechnie, a manufacturer of aerospace components, and Dynacast, which makes small engineered precision components, in 2005. It sold its aerospace and aftermarket businesses in 2007.
Rothschild, RBC Europe and Investec are advising Melrose, while GKN is working with Gleacher Shacklock, JPMorgan Cazenove and UBS.
Reporting by Noor Zainab Hussain, Justin George Varghese in Bengaluru and Paul Sandle in London; Editing by Alexander Smith and Mark Potter