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GKN PLC (GKN)

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Monday 12 March, 2018

GKN PLC

Publication of Second Response Circular

RNS Number : 3401H
GKN PLC
12 March 2018
 

LEI: 213800QNZ22GS95OSW84

 

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, IN, INTO OR FROM ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OR REGULATIONS OF THAT JURISDICTION.

 

12 March 2018


GKN plc ("GKN")

Publication of Second Response Circular

 

The Board of GKN (the "Board") announces that following the publication of its first response circular on 15 February 2018, it is today publishing its second response circular (the "Second Response Circular") in connection with the unsolicited offer made by Melrose Industries PLC ("Melrose") to acquire the entire issued and to be issued share capital of GKN for 1.49 new Melrose shares and 81 pence in cash per share (the "Offer").

 

The Board continues to view the Offer as entirely opportunistic and believes that its terms fundamentally undervalue GKN and its prospects. A letter from the Chairman of GKN to GKN shareholders, as set out in the Second Response Circular, has been extracted below.

 

 

LETTER TO GKN SHAREHOLDERS FROM THE CHAIRMAN OF GKN

                                                            GKN plc                                                     GKN plc
                                                                                                                                PO Box 55
                                     GKN plc is registered in England No. 0491106                         Ipsley House
                                                                                                                                Ipsley Church Lane
                                                                                                                                Redditch
                                                                                                                                Worcestershire, B98 0TL
                                                                                                                                                             England
                                                                                                                                                             T +44 (0)1527517715
                                                                                                                                                             F +44 (0)1527517700

 

12th March 2018

Dear Shareholder,

Thank you for taking the time to read this document.  It contains further important information which we believe is of great significance to you, our shareholders, on the last day we are permitted to provide material new information in connection with Melrose's offer.  As you know, on 1st February 2018 Melrose made an offer for GKN which, on the basis of its latest share price, values your company at only 416p per share and would leave you with just 57% of an enlarged Melrose.  Your Board continues to believe this offer fundamentally undervalues GKN.  Let me explain why.

Your Board believes our new strategy, including accelerated separation, will maximise shareholder value

The new GKN leadership team, headed by Chief Executive Anne Stevens and Finance Director Jos Sclater, is already implementing our new strategy which we believe will maximise shareholder value.  This includes our recently announced combination of GKN Driveline and Dana to accelerate the separation of your businesses. 

There are three core components of our strategy to maximise shareholder value.  The first is unlocking the value of our world class Aerospace business through the creation of a standalone company, which we expect will positively re-rate in line with peers. Combined with improvements from Project Boost, we aim to create a business with world class financial performance.

The second is the combination of GKN Driveline and Dana, bringing together two highly complementary businesses and creating a global leader in driveline.  Your Board believes that the proposed combination is on highly attractive terms for our shareholders. The transaction involves Dana taking on a significant proportion of our UK pension scheme liabilities. This has allowed us to agree a deficit elimination plan with the Trustees of our UK pension schemes. Once implemented, this plan is expected to enable GKN Aerospace to operate without any UK pension deficit.

The third is returning up to £2.5bn in cash to our shareholders over the next three years, a significant part of which is expected to be delivered in the next 12 to 18 months.  This cash will primarily come from the divestment of Powder Metallurgy and other non-core businesses, together with the net cash proceeds received from the combination of GKN Driveline and Dana.

Your Board believes that you should receive all of the benefits of this value creation strategy. 

Delivering increased value from GKN's world class Aerospace business

GKN Aerospace is a Tier 1 aerospace business with fantastic customer partnerships and technology positions on key growth platforms.  In our Aero Engines product segment alone, we expect to generate $13.5bn1 of net cash flows from our outstanding revenue and risk sharing partnership (RRSP) portfolio from 2018 to 2055.  Our RRSPs make up just 18% of our Aerospace sales and are set to generate cash flow for decades to come.

We are well underway with Project Boost, which is expected to deliver a step change in profit margin and cash generation. On 27th February 2018, we outlined the details of Project Boost in Aerospace, where we are targeting £160m2 of recurring annual cash benefit from the end of 2020.  This is underpinned by the move to a Global Operating Model, bringing our world leading business together in a more effective and efficient way to gain economies of scale and the benefits of standardisation.  When this programme is complete, we expect to achieve margins of at least 14%3 in GKN Aerospace's core product segments.

Divisional Chief Executive Hans Büthker and his team have committed to this and your Board is convinced they can deliver.  Supported by world class financial performance, your Board expects GKN Aerospace will positively re-rate in line with peers.  We believe you should keep all of the rewards of your long term investment in this business.

Since we announced our intention to separate our businesses, we have received a number of approaches for GKN Aerospace at values significantly above what we believe is reflected in GKN's share price today.  Your Board has chosen not to proceed with any of these approaches as we are focused on the opportunities presented by the Project Boost improvement plan, the RRSP portfolio and a positive re-rerating for GKN Aerospace. We are committed to creating an even more valuable Aerospace business.

The GKN Driveline and Dana combination will create significant value for GKN shareholders

The combination of GKN Driveline with Dana will result in GKN shareholders owning 47.25% of the enlarged Dana and GKN receiving net cash proceeds of £1.2bn. As I write this letter, this transaction values GKN Driveline at an enterprise value of $6.2bn (£4.5bn), equivalent to a 2017 EV / EBITDA multiple of 7.6x.

GKN Driveline and Dana are highly complementary businesses.  The combination creates a global leader in driveline which is well-placed for future growth.  It combines two companies with rich heritages, similar cultures and a shared focus on innovation.  It is an excellent strategic fit, well-positioned as the automotive market undergoes increasing electrification. The new Dana will be a UK public limited company, listed on the New York Stock Exchange. 

The combination is also expected to deliver significant annual run rate cost synergies of $235m (£170m)4 by the end of the third year following completion.  This is over and above the GKN Driveline Project Boost target of £153m2 of recurring annual cash benefit from the end of the 2020.

GKN is progressing at pace with non-core disposals

Over the next 12 to 18 months, GKN will work to sell businesses identified as non-core, including the high quality Powder Metallurgy business.  We have received good buyer interest for these non-core businesses, and several of our divestment processes are already underway.  This is expected to form a large portion of the cash of up to £2.5bn which we intend to return to our shareholders over the next three years.  It will also help to maintain an investment grade credit rating for GKN Aerospace.

Melrose's offer does not come close to reflecting GKN's true value

Your Board believes that Melrose lacks experience in several critical areas and that its priorities are inappropriate for running a global technology-based business like GKN. Furthermore, your Board believes Melrose's offer does not come close to reflecting the true value of your company. I will address each of these points in turn.

First, Melrose's experience in aerospace and automotive and, in particular, with large customers in these sectors, such as Airbus, Boeing, Ford and VW, is minimal.  Melrose's record in cyclical industries is weak.  The performance of Brush, Melrose's longest held acquisition and a cyclical business, is poor; only last month, Melrose announced a significant write down of the carrying value of this business. 

With regard to Melrose's priorities, your Board notes that in 2017, Melrose paid its top eleven executives virtually the same amount in performance incentives as its entire stated spend on research and development (R&D) over the past five years.

Above all, your Board maintains that the offer fundamentally undervalues GKN.  Melrose is offering a premium lower than any relevant FTSE 100 takeover in the last ten years, and substantially lower than any of its previous acquisitions.  We have shown on page 23 of this document5 an illustrative trading sum-of-the-parts value of your business.  This indicates a value of over 500p6 per GKN share.  In short, your Board believes Melrose's offer is simply derisory. 

Do not complete any form of acceptance from Melrose or its advisers

Your Board, which has been so advised by Gleacher Shacklock, J.P. Morgan Cazenove and UBS (the "Advisers") as to the financial terms of the offer, believes that Melrose's offer fundamentally undervalues GKN.  In providing their financial advice to the Board, the Advisers have taken into account the Board's commercial assessments.  Gleacher Shacklock and UBS are providing independent financial advice to the Board for the purposes of Rule 3 of the City Code.

Accordingly, the Board unanimously recommends that you should take no action in relation to the offer and that you should not sign any document which Melrose or its advisers send to you.  Your Directors will not be accepting Melrose's offer in respect of their own beneficial shareholdings.

Yours sincerely,

 

Mike Turner CBE, Chairman of GKN

Notes:

1 This statement has been calculated from a cash flow forecast which the Takeover Panel has determined should be treated as a 'profit forecast' in accordance with the City Code (see Appendix III of the Second Response Circular).

2 This statement includes a quantified financial benefits statement which has been reported on for the purposes of the City Code (see Appendix IV of the Second Response Circular). This does not take into account of any relevant proportion of one-off associated incentive payments, which are estimated to be, in aggregate, in the region of £70m for Project Boost as a whole and which have not been reported on for the purposes of the City Code. This £70m does not take into account any changes to such incentive arrangements as a consequence of completion of the Dana transaction and excludes any impact of potential disposals.

3 The target 2020 management trading profit margin should not be construed as a profit forecast or interpreted as such.

4 This statement includes a quantified financial benefits statement which has been reported on for the purposes of the City Code (see Appendix V of the Second Response Circular). 

5 This statement refers to page 23 of the Second Response Circular.

6 Illustrative valuation on the basis of a number of assumptions that are detailed in the 'sources and bases' (see Appendix I of the Second Response Circular). This is not an asset valuation for the purposes of Rule 29 of the City Code.

Contacts:

GKN plc

Guy Stainer, Investor Relations Director                                                                           

Tel: +44 (0)20 7463 2382

 

FTI Consulting

Andrew Lorenz / Richard Mountain                                                                                                        

Tel: +44 (0)203 727 1340

Gleacher Shacklock (Financial Adviser to GKN plc)

Tim Shacklock, Dominic Lee, Tom Quinn                                                           

Tel: +44 (0)20 7484 1150

J.P. Morgan Cazenove (Financial Adviser and Corporate Broker to GKN plc)

Robert Constant, Dwayne Lysaght, Stephen Smith                                       

Tel: +44 (0)20 7742 4000

UBS (Financial Adviser and Corporate Broker to GKN plc)

Hew Glyn Davies, James Robertson, Jonathan Retter                                 

Tel: +44 (0)20 7567 8000

Publication on a website

In accordance with the requirements of Rule 26.1 of the City Code on Takeovers and Mergers (the "City Code"): (i) a copy of the Second Response Circular will shortly be made available on www.gkn.com and a copy of the Second Response Circular has been submitted to the National Storage Mechanism and will shortly be made available for inspection at www.morningstar.co.uk/uk/NSM/; and (ii) a copy of this announcement will be published on the GKN website (www.gkn.com) by no later than 12 noon on the business day following this announcement. The content of the website referred to in this announcement is not incorporated into and does not form part of this announcement.

To view our Day 39 defence film, where we summarise the key reasons GKN shareholders should reject the Melrose bid, visit www.gkn.com/offer

Further information

This announcement is not intended to, and does not, constitute or form part of any offer, invitation or the solicitation of an offer to purchase, otherwise acquire, subscribe for, sell or otherwise dispose of, any securities whether pursuant to this announcement or otherwise.

 

The distribution of this announcement in jurisdictions outside the United Kingdom may be restricted by law and therefore persons into whose possession this announcement comes should inform themselves about, and observe, such restrictions. Any failure to comply with the restrictions may constitute a violation of the securities law of any such jurisdiction.

 

Gleacher Shacklock LLP ("Gleacher Shacklock"), which is authorised and regulated by the Financial Conduct Authority in the United Kingdom, is acting exclusively as financial adviser to GKN and no one else in connection with the matters set out in this announcement and will not be responsible to anyone other than GKN for providing the protections afforded to clients of Gleacher Shacklock or for providing advice in connection with the subject matter of this announcement or any other matter referred to herein.

 

J.P. Morgan Securities plc (which conducts its UK investment banking business as J.P. Morgan Cazenove) ("J.P. Morgan Cazenove") is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority in the United Kingdom. J.P. Morgan Cazenove is acting exclusively as financial adviser to GKN and no one else in connection with the matters set out in this announcement and will not regard any other person as its client in relation to the matters set out in this announcement and will not be responsible to anyone other than GKN for providing the protections afforded to clients of J.P. Morgan Cazenove or its affiliates, nor for providing advice in relation to any matter referred to herein.

 

UBS Limited ("UBS") is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority in the United Kingdom. UBS is acting exclusively as financial adviser to GKN and no one else for the purpose of the consideration of a proposed acquisition by Melrose and will not be responsible to anyone other than GKN for providing the protections offered to clients of UBS nor for providing advice in relation to the subject matter of this announcement or any transaction, arrangement or other matter referred to herein.

 

Disclosure requirements of the City Code

 

Under Rule 8.3(a) of the City Code, any person who is interested in 1% or more of any class of relevant securities of an offeree company or of any securities exchange offeror (being any offeror other than an offeror in respect of which it has been announced that its offer is, or is likely to be, solely in cash) must make an Opening Position Disclosure following the commencement of the offer period and, if later, following the announcement in which any securities exchange offeror is first identified. An Opening Position Disclosure must contain details of the person's interests and short positions in, and rights to subscribe for, any relevant securities of each of (i) the offeree company and (ii) any securities exchange offeror(s). An Opening Position Disclosure by a person to whom Rule 8.3(a) applies must be made by no later than 3.30 pm (London time) on the 10th business day following the commencement of the offer period and, if appropriate, by no later than 3.30 pm (London time) on the 10th business day following the announcement in which any securities exchange offeror is first identified. Relevant persons who deal in the relevant securities of the offeree company or of a securities exchange offeror prior to the deadline for making an Opening Position Disclosure must instead make a Dealing Disclosure.

 

Under Rule 8.3(b) of the City Code, any person who is, or becomes, interested in 1% or more of any class of relevant securities of the offeree company or of any securities exchange offeror must make a Dealing Disclosure if the person deals in any relevant securities of the offeree company or of any securities exchange offeror. A Dealing Disclosure must contain details of the dealing concerned and of the person's interests and short positions in, and rights to subscribe for, any relevant securities of each of (i) the offeree company and (ii) any securities exchange offeror(s), save to the extent that these details have previously been disclosed under Rule 8. A Dealing Disclosure by a person to whom Rule 8.3(b) applies must be made by no later than 3.30 pm (London time) on the business day following the date of the relevant dealing.

 

If two or more persons act together pursuant to an agreement or understanding, whether formal or informal, to acquire or control an interest in relevant securities of an offeree company or a securities exchange offeror, they will be deemed to be a single person for the purpose of Rule 8.3.

 

Opening Position Disclosures must also be made by the offeree company and by any offeror and Dealing Disclosures must also be made by the offeree company, by any offeror and by any persons acting in concert with any of them (see Rules 8.1, 8.2 and 8.4).

 

Details of the offeree and offeror companies in respect of whose relevant securities Opening Position Disclosures and Dealing Disclosures must be made can be found in the Disclosure Table on the Takeover Panel's website at www.thetakeoverpanel.org.uk, including details of the number of relevant securities in issue, when the offer period commenced and when any offeror was first identified. You should contact the Panel's Market Surveillance Unit on +44 (0)20 7638 0129 if you are in any doubt as to whether you are required to make an Opening Position Disclosure or a Dealing Disclosure.


Cautionary Statement - other matters

 

This announcement contains forward looking statements in relation to matters other than the agreement between GKN and Dana on the proposed combination of GKN's Driveline business and Dana to create Dana plc (the "Proposed Transaction") which are made in good faith based on the information available at the time of its approval. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a number of risks and uncertainties that are inherent in any forward looking statement which could cause actual results to differ materially from those currently anticipated. Nothing in this document should be regarded as a profit forecast.

 

Cautionary statement - Proposed Transaction

 

This announcement contains forward looking statements which are made in good faith based on the information available at the time of its publication. The forward-looking statements contained in this announcement may include statements about the expected effects of the Proposed Transaction on GKN, Dana, Dana plc and/or GKN Aerospace, the anticipated timing and benefits of the Proposed Transaction, GKN's and Dana's anticipated standalone financial results and all other statements in this document other than statements of historical facts. Without limitation, any statements preceded or followed by or that include the words "targets," "plans," "believes," "expects," "intends," "will," "likely," "may," "anticipates," "estimates," "projects," "should," "would," "positioned," "strategy," "future" or words, phrases or terms of similar substance or the negative thereof, are forward-looking statements. It is believed that the expectations reflected in these statements are reasonable but they are based upon a number of assumptions that are subject to change and they may be affected by a number of risks and uncertainties that are inherent in any forward looking statement which could cause actual results to differ materially from those currently anticipated. Such risks, uncertainties and assumptions include: the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement; the satisfaction of the conditions to the Proposed Transaction and other risks related to Completion and actions related thereto; GKN's and Dana's ability to complete the Proposed Transaction on the anticipated terms and schedule, including the ability to obtain shareholder or regulatory approvals of the Proposed Transaction; the ability of the parties to integrate successfully GKN Driveline with the business of Dana following the consummation of the Proposed Transaction and to realize the anticipated synergies (including any anticipated tax synergies) and other benefits expected from the Proposed Transaction; the effects of government regulation on GKN's or Dana's businesses; the risk that disruptions from the Proposed Transaction will harm GKN's or Dana's business; the effect of the announcement of the Proposed Transaction on the ability of GKN and Dana to retain customers and retain and hire key personnel and maintain relationships with their suppliers, and on their operating results and businesses generally; potential litigation in connection with the Proposed Transaction; and other factors detailed in GKN's Annual Report and Accounts 2016 and Dana's reports filed with the SEC, including its Annual Report on Form 10-K under the caption "Risk Factors". Nothing in this document should be regarded as a profit forecast. Forward-looking statements included herein are made as of the date hereof, and none of GKN, Dana or Dana plc undertakes, and each expressly disclaims, any obligation to update publicly such statements to reflect subsequent events or circumstances.

 

No offer or solicitation

 

This communication shall not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

 

Additional information and where to find it

 

This communication may be deemed to be solicitation material in respect of the Proposed Transaction. The Proposed Transaction will be submitted to a vote of Dana's stockholders and a vote of GKN's shareholders. In connection with the Proposed Transaction, it is intended that Dana plc will file with the SEC a registration statement on Form S-4, containing a prospectus with respect to Dana plc's ordinary shares to be issued in the Proposed Transaction (the "Prospectus") and a proxy statement for Dana's stockholders (the "Proxy Statement"), and Dana will mail the Proxy Statement to its stockholders and file other documents regarding the Proposed Transaction with the SEC. Further, it is intended that GKN will mail a circular to its shareholders (the "Circular") containing further details in relation to the Proposed Transaction and notice of the general meeting. DANA'S SECURITYHOLDERS AND GKN'S SHAREHOLDERS ARE URGED TO CAREFULLY READ ALL RELEVANT DOCUMENTS FILED WITH THE SEC, INCLUDING THE PROSPECTUS AND THE PROXY STATEMENT, AND THE CIRCULAR WHEN THEY BECOME AVAILABLE, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PARTIES, THE PROPOSED TRANSACTION AND DANA PLC. Investors will be able to obtain copies of the Prospectus and the Proxy Statement as well as other filings containing information about Dana, without charge, at the SEC's website, http://www.sec.gov. Copies of documents filed with the SEC by GKN will be made available free of charge on GKN's Investor Relations Website. Copies of documents filed with the SEC by Dana or Dana plc will be made available free of charge on Dana's Investor Relations Website.

 

Participants in the solicitation

 

GKN and its directors and executive officers, and Dana and its directors and executive officers, may be deemed to be participants in the solicitation of proxies from the holders of Dana common stock in respect to the Proposed Transaction. Information about the directors and executive officers of GKN is set forth in GKN's Annual Report and Accounts 2016. Information about the directors and executive officers of Dana is set forth in the definitive proxy statement for Dana's 2017 Annual Meeting of Stockholders, which was filed with the SEC on March 16, 2017. Investors may obtain additional information regarding the interests of such participants by reading each of the Prospectus and the Proxy Statement and the Circular regarding the Proposed Transaction when it becomes available.

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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