Melrose Woos GKN with £1 Billion Pension Injection in Takeover Bid

Investment firm says current merger plan will leave GKN with £3 billion in pension liabilities.

UK-based investment company Melrose has offered to boost engineering firm GKN’s pension fund by £1 billion ($1.41 billion) in attempt to convince the company’s shareholders to accept its hostile takeover bid.

However, GKN has so far shunned Melrose’s takeover bid, preferring a $6.1 billion deal to merge its automotive business with US-based Dana Incorporated (DAN.N), which would allow it to keep its aerospace division. Melrose focuses on the acquisition and performance improvement of underperforming companies.

“Unless they accept our offer, GKN shareholders will end up with shares in an aerospace business overburdened with up to £3 billion of pension liabilities,” said Christopher Miller, chairman of Melrose in a release. “By accepting the Melrose Offer, GKN Shareholders will keep the potential value of all the GKN assets as majority owners of a much larger business.”

Melrose argues that the proposed sale of the automotive unit at 7.5 times EBITDA values it at approximately £800 million less than the valuation that GKN assigned the division as recently as last month. It said the £1 billion injection into the pension fund represents almost twice the amount of the deficit reduction package of approximately £528 million under GKN’s planned disposals. The firm also reduced its acceptance condition for the offer to 50% plus one share from 90% in attempt to sweeten the deal.

Under the terms of Melrose’s takeover offer, GKN Shareholders would receive £0.81 in cash and 1.69 new Melrose shares for each GKN Share. With the final dividend of 6.2 pence per GKN share, the offer values each GKN Share at 466 pence based on Melrose’s March 16 closing price of 224.2 pence.  As a result, GKN shareholders would receive £1.4 billion in cash, and own 60% of the enlarged Melrose group.

Melrose said that under GKN’s merger plan with Dana, the proposed methods to reduce liabilities would include incentivizing pension members to give up some of their benefits, or to leave the plan altogether.  It also said that even if GKN is successful in reducing gross pension liabilities to £2.2 billion, the ratio would still be approximately eight times its management trading profit, compared to the average ratio for aerospace companies of approximately 3.7 times trading profit.

The deadline for GKN to accept the offer is Mar. 29.

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