UPDATE: GKN Criticises Melrose Industries' New Pension Proposals

22nd Mar 2018 14:17

LONDON (Alliance News) - FTSE 100-listed engineering firm GKN PLC said Thursday the newly-agreed pension proposals of potential suitor Melrose Industries PLC "destroy shareholder value" as it seeks to persuade its investors to reject Melrose's hostile GBP8.4 billion bid for firm.

GKN's announcement came shortly after Melrose agreed a deal with GKN's pension scheme trustees to provide up to GBP1.0 billion in cash contributions in order to "prudently fund" the GKN schemes. This, Melrose said, was "in line" with its original assumptions with regard to its GKN acquisitions.

GKN responded, however, by arguing the proposal would create "potential value leakage" of more than GBP300 million, resulting in a deficit of GBP674 million.

Melrose's plan, GKN said, did "nothing" to address the overall size of the pension liability of the group. Under Melrose's scheme, GKN believed the total liability would remain "in excess" of GBP4.3 billion. This would be in addition to the high leverage level of 2.5x net debt to earnings before interest, tax, depreciatio, and amortisation the combined firm would have after completion.

"By contrast, GKN's agreed plan is to reduce the global gross liabilities to around GBP2.2 billion (less than GBP2 billion in the UK) and adopt a low risk investment strategy to substantially remove the future volatility of the remaining UK schemes," GKN explained.

As part of Melrose's deal earlier on Thursday, the FTSE 250-listed industrial turnaround specialist said it would pay an initial GBP150 million. Of this, GBP60 million will be paid to the 2016 pension scheme to "secure self-sufficiency" at a discount rate of Gilts plus 25 basis points.

Melrose also agreed to provide a "safer funding basis" for the 2012 pension scheme. With this, it targets full funding using a discount rate of Gilts plus 75 basis points, and it plans to achieve this through the doubling of annual contributions to GBP60 million. It also agreed a formula for contributions in the event of disposals.

Melrose Chairman Christopher Miller said: "The agreement with the GKN pension scheme trustees is another concrete example of Melrose's exemplary track record with pension schemes and its desire to look after all stakeholders."

"This agreement would significantly improve the position of the members of GKN's pension schemes and is in line with our original plans for the business," Miller added. "We are delighted to secure another important step in our offer to buy GKN."

GKN countered, however, that Melrose's proposals committed GBP450 million over five years of which around 40% would not be paid until 2020 to 2022.

"The balance of contributions appears completely dependent on promises from future disposals which have uncertain outcomes," GKN added. "By contrast, under GKN's comprehensive plan, contributions totalling GBP749 million are expected to be made during the next 12-18 months, which are expected to completely eliminate the UK deficit."

GKN Finance Director Jos Sclater said: "It has taken Melrose more than 11 weeks to get to this point with the pension trustees. Melrose attempted an inadequate offer in the first place and has now had to agree to an economically inefficient settlement to address the trustees' rightful concerns over Melrose's proposed high leverage structure for GKN and uncertainty of future ownership of the businesses. Melrose has not agreed any meaningful actions to reduce short term liabilities."

"In contrast," Sclater added, "GKN has a clear and comprehensive plan to reduce the liabilities and eliminate the actuarial deficit in its UK pension schemes and to unburden the aerospace business from the drag on free cash flow resulting from pensions. Our proposal preserves our pensioners' benefits but in a much more cost effective way for our shareholders."

"Melrose's plan is bad for shareholders, causing potential value leakage of more than GBP300 million opposite the IAS 19 deficit whilst leaving the schemes with very substantial liabilities which would make any disposal of businesses much more challenging in the future," Sclater continued. "As I have said before, our shareholders and pensioners deserve better."

Melrose - a FTSE 250-listed industrial turnaround firm - raised its offer for GKN earlier in March to GBP8.4 billion from the initial GBP7.1 billion announced in January. Within the new offer, Melrose took aim at what it saw as inadequacies in GKN's pension proposals after its merger deal with Dana Inc regarding its automotive unit.

Melrose's increased bid followed the announcement earlier in the month that GKN had reached an agreement to combine its automotive Driveline business with New York-listed engineering firm Dana Inc in a USD6.1 billion cash-and-shares deal.

Pensions have become a prominent battle ground in the war of words between GKN and Melrose. On Wednesday, GKN rejected Melrose's claims regarding its pensions funding. Rather than "substantially" reducing cash contribution to its pension schemes as Melrose suggests, GKN said it raised its annual cash contribution from GBP100 million to GBP121 million and then to GBP344 million in 2015, 2016 and 2017, respectively.

Melrose's statement that the Dana deal would see just GBP528 million contributed as a deficit reduction package was refuted as well. GKN argued it would contribute GBP749 million, of which GBP625 million would come from GKN and GBP124 million from Dana.

In a separate announcement earlier on Thursday, GKN reiterated its belief that Melrose's bid was "entirely opportunistic" and "fundamentally undervalues" the firm.

GKN Chairman Mike Turner reiterated his belief that GKN's own deal with Dana was an "attractive combination". Turner added GKN's further sales of non-core assets to focus on its Aerospace business rendered Melrose's offer "wholly inadequate in comparison to the value creation potential inherent in this strategy."

Turning to concerns raised by GKN's largest customer - Airbus SE - Turner urged investors to reject Melrose's offer, which is open for acceptances until March 29.

"Airbus has publicly stated its significant concerns about GKN being owned by a company with a short term investment horizon," Turner explained. "We believe that Airbus is right to be concerned about such an approach and the comments from Airbus reinforce our firmly held belief that Melrose is not an appropriate owner of GKN. Indeed, throughout this process, Melrose has shown itself to be an unsuitable steward of your company with no long term plan."

Shares in Melrose were 0.3% lower at 222.90 pence on Thursday, GKN 0.1% higher at 429.50 pence.

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