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Melrose shares rise: all good – on paper

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If you were looking for shares in UK engineering firm and government contractor GKN this morning you wouldn’t have been able to find them. They were delisted by Melrose Industries, the “buy-improve-sell” specialist which managed to complete its hostile takeover of GKN in April. Shareholders clearly liked the news because Melrose shares were among the five most traded on the London Stock Exchange this morning and rose in value by 1.3%.

Although GKN, which produces fighter jet and sports cars components including for BMWs, resisted the takeover, Melrose eventually acquired a 94% stake and received the green light from the UK government for the takeover.

Melrose reached agreement with UK government on defence sales

GKN supplies parts for military aircraft including the A400M transporter and the F-35 and Typhoon fighters. The composite technology used in the A400M’s wing spars is crucial for the UK’s wing strategy and because of that Melrose had to makes several guarantees to the government including that it will keep ministers informed on all GKN defence contracts and give them the right to veto any sale of defence assets that might have implications for national security. It also said it would make sure that the UK will keep intellectual rights on various research and development projects.

Melrose plans to provide more guidance on what will happen with GKN in the first week of September when it is due to publish its interim results.

Airbus threatens to stop GKN orders

So far, so good – on paper. There is no doubt that Melrose has the business savvy to whip the components engineer into shape but the question is at what cost? GKN’s largest customer Airbus had already said it may not give any new business to GKN if the Melrose deal went ahead. This is primarily because the nature of aircraft building is far more long term than the five years that Melrose intends to keep the company under its ownership.

In April, Tom Williams, the chief operating officer of the commercial aircraft division at Airbus said that it would be practically impossible for Airbus to give any new work to GKN if they don’t know who would be the long-term owner of the company. If Airbus really does pull out this would be the cue for other big buyers of GKN components to start looking elsewhere.

In the last few weeks Melrose replaced GKN’s board after it had received acceptances for its offer from some 85% of GKN shareholders and it expects to have full control in June.

If I was a gambler, I would say the warm glow from the GKN acquisition will be short lived. But not for all. Although some of Melrose’s shareholders rebelled against the £42 million pay package due to be paid to the company’s senior executives, the package was approved at the company’s AGM last week.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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