GKN is moving rapidly to forge a ‘white knight’ merger with America’s Dana as soon as next week.
In spite of political pressure on business secretary Greg Clark and defence secretary Gavin Williamson there is no Government enthusiasm for any intervention to halt the ‘Melrose Three’.
If they are successful in swallowing all of GKN, Melrose chairman Chris Miller and colleagues David Roper and Simon Peckham could reap personal riches of £285million – embarrassing capitalism and the Government.
The GKN team has concluded that the only way of preserving Driveline and GKN’s Edrive (electric technology) is by finding an acceptable partner – Dana.
Dana has a strong balance sheet, provides drive shaft technology for off-road vehicles, trucks and SUVs and would be a good fit.
A GKN Driveline worker assembles a transmission. The division has a strong balance sheet, provides drive shaft technology for off-road vehicles, trucks and SUVs
As an owner of Driveline it would also offer customers, such as Britain’s Jaguar Land Rover and Toyota, the certainty of supply they need.
Ideally, the merged company would find room for GKN directors and commit to a UK headquarters.
One of the great paradoxes of corporate life is that companies that do several things are undervalued by investors. But when they do the splits they become easy meat for takeovers.
Kraft’s hostile bid for Cadbury only became attractive after activist shareholder Nelson Peltz pressured for the sell-off of Schweppes.
When Cadbury was faced with a hostile offer from Kraft it rightly searched for a white knight.
First choice was a merger with Hershey, which makes Cadbury products under licence in the US. A European deal with Ferrero briefly seemed to be a possibility.
The difference this time is that the hostile bidder, Melrose, is British.
On the other hand, Dana is American. The history of overseas takeovers suggests that pledges made at the time of the deal are rarely fulfilled and that when push comes to shove it would be the jobs and technology with most distance from the ultimate owners which would suffer.
So why did GKN go in search of a deal of its own?
After the company’s round of shareholder meetings it concluded that if Melrose were to raise the offer price to 450p to 460p per share, upwards of 70 per cent of shareholders would go with the flow.
Big UK investors including Schroders, Old Mutual and Aberdeen Standard Life may preach long-term thinking in public but don’t back it with their funds.
Asset managers earn bonuses for performance and, with so much competition for the savers’ pound, it takes an act of bravery to value earnings over ten years more than the quick profits.
What will Melrose do if GKN is able and willing to play its white knight?
It can press ahead with its higher bid for the whole caboodle, hoping that it can keep investors on board.
Or it could seek to recalibrate its bid to buy what is left once the Driveline sale has been completed.
The difficulty for Melrose could be that once Driveline has been passed on, the value of aerospace, with its high margin and valuable Airbus wing and US military contracts, will be more obvious.
Shares in the GKN rump will climb and the prospects of Melrose being able to squeeze the lemon will diminish.
Once Melrose opened the door to a GKN break-up and made a bid, it became impossible to imagine the Redditch-based engineer surviving in its present form despite a great record of bringing innovation (not all of it home-grown) into production.
West Midlands mayor Andy Street, a business-savvy Tory, rightly has risen to defend one of his region’s emblematic companies.
But without the support of a supine business secretary Greg Clark or, even better, the Prime Minister, the case for saving GKN may sadly fall on deaf ears.
There is a view among some fund managers that it is time to forgive and forget the grotesque greed at housebuilder Persimmon now that better governance is being put in place and abstruse boss Jeff Fairburn has agreed to hand back £25million of his £112million pay cheque.
These are no more than empty gestures by an executive team that has profiteered at the expense of the taxpayer-funded Help to Buy scheme.
Time for pennywise Chancellor Philip Hammond to demand a refund.