S&P Puts GKN's BBB- Rating On CreditWatch Negative Amid Poor Options

8th Mar 2018 13:56

LONDON (Alliance News) - S&P Global Ratings placed the BBB- credit rating for FTSE 100-listed engineer GKN PLC on negative CreditWatch on Tuesday after believing both main options open to the firm after Melrose Industries PLC hostile bid could result in a weakened credit quality.

GKN is the subject of an increasingly hostile GBP7.4 billion bid from FTSE 250-listed Melrose launched in January. Since then, GKN's board has repeatedly called on shareholders to reject the offer and characterising it as "low price and high risk".

Under the proposed offer, GKN shareholders will receive 1.49 new Melrose shares and 81 pence in cash for each GKN share. The deal valued each GKN share at 430.1 pence and includes a mix and match facility.

S&P analyst Eve Seiltgens believes that, should the deal go through, it would weaken GKN's credit metrics.

"We believe the takeover, if successful, could weaken GKN's creditworthiness," S&P explained. "This is because, in the absence of a clear capital structure for the enlarged entity, we estimate that the enlarged group's debt will increase by GBP1.4 billion, which is the cash consideration for the bid."

"The impact of the potential takeover on GKN's business risk profile is difficult to assess at this stage," S&P added. "It would depend on our view of the fit with Melrose's other investments and the growth potential of the enlarged entity."

Shortly after the Melrose approach, GKN announced its "Project Boost" in order to persuade investors to reject Melrose's advances. Under the plan, GKN said it intends to return up to GBP2.5 billion to shareholders over the next three years. The engineering firm said a "significant" part of this will come from divestments over the first 12 to 18 months of the plan.

GKN intends to separate its aerospace and automotive businesses. Late in February, it said it would do this through a demerger or GKN Driveline and GKN Aerospace completed by the middle of 2019.

Last Friday, GKN said it was in discussions with New York-listed engineering firm Dana Inc regarding a potential merger with GKN's driveline unit after its planned demerger.

S&P believes that - though there is no certainty a deal will be struck - any such disposal of its Drivetrain business could threaten GKN's credit health.

"We believe that GKN's credit quality could weaken because its remaining business after a potential separation would be smaller and less diverse," S&P explained. "Any evaluation of GKN's financial risk profile would be contingent on increased visibility on the capital structure in the event of a separation of GKN Driveline."

S&P said it will resolve the CreditWatch within 90 days. During this time, it expects more clarity with regards to Melrose's hostile bid as well as the possible sale of GKN's drivetrain unit.

The credit analyst argued that should Melrose's bid complete, GKN would be subject to a one-notch downgrade. Should GKN dispose of its drivetrain business, however, an up to two-notch downgrade will face the firm.

S&P did note, however, that GKN has committed to returning cash to shareholders whilst also maintaining an investment-grade credit rating.

Shares in GKN were flat at 420.45 pence on Thursday, Melrose 0.3% lower at 214.90 pence.

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