Melrose Industries plans to spin off GKN’s automotive division as a new UK-listed company, which will crystallize the dissolution of one of Britain’s oldest engineering businesses.
The FTSE 100 turnaround specialist, which acquired the auto parts and aerospace component maker in a bitter £8billion takeover in 2018, confirmed the move on Thursday, along with its interim results so far. at the end of June.
Under the plan, Melrose will separate GKN’s automotive and small powder metallurgy businesses from its aerospace arm through a stock split. Melrose shareholders will own shares of the holding company.
The new car company, one of the world’s leading suppliers of vehicle driveshafts, will aim to trade on the London Stock Exchange next year under an as yet undecided name.
Melrose will retain ownership of GKN Aerospace, a leading supplier of airframe structures and engine components to aerospace and defense companies including Airbus and Rolls-Royce.
The spun-off car group will account for around two-thirds of Melrose’s current revenue forecast for 2022, or more than £7.5bn. Liam Butterworth, the chief executive of GKN Automotive, will become head of the split company, with a separate chairman to be named later.
Simon Peckham, Melrose’s chief executive, and Geoffrey Martin, chief financial officer, will serve as executive directors on the split group’s board of directors while retaining their current roles.
The move will finalize the dismantling of GKN, one of Britain’s oldest engineering names whose roots date back to the late 1700s with the founding of a steelworks in South Wales.
Melrose, a turnaround specialist with a loyal following in the city, acquired GKN in 2018, raising concerns among critics that it would break up the conglomerate. The company argued that it identifies underperforming manufacturing companies, restructures them and resells them. It has generated substantial returns for executives and shareholders over the years.
Peckham told the Financial Times that the company had always intended to split the business. The company would bring the automotive and metals business back to the stock market in a much stronger financial position.
“I would say, well done mate, we always told you we would break up . . . No shit, Sherlock,” he told the FT.
“From a government perspective, what more could you ask for than two major listed UK companies,” he added.
It was the right time for a split. Much of the underlying restructuring work in the automotive sector had been done, while the sale of its US heating and air conditioning business, Nortek, had significantly strengthened the group’s balance sheet, Peckham said. Melrose had also delivered on its commitment to GKN’s pension plans which were now surplus.
The restructuring of the aerospace industry is slow and will take another year.
Melrose, Peckham added, was now at a stage where “these two companies can have a good independent life and go and have fun in the nicest way possible.” By trading separately, the two companies should be able to raise funds on the stock market and pursue acquisitions.
Along with other industrial groups exposed to aerospace and automotive, shares of Melrose have been hit hard by the Covid-induced downturn. At 137p, the level they closed on Wednesday, they are down more than 25% year-to-date. They were trading above 250p at the end of March 2018 when Melrose won the battle to take over GKN.
The company believes it can triple the profits of the aerospace industry and double those of the automotive unit.
Melrose sees consolidation opportunities in the automotive sector in particular, as suppliers come under increased pressure in the transition to electric vehicles. About half of new orders in GKN’s driveshaft business are for parts for electric models, which are made in the same factories that equip motor cars.
The company said it expects 45% of its work by 2025 to be in electric vehicles, which generate higher margins than its traditional contracts.
Adjusted interim results to the end of June showed revenue of £3.9bn, slightly up from £3.7bn in the same period a year earlier. Adjusted pre-tax profit over the six months was £128m. Statutory results showed a pre-tax loss of £358m, up from a loss of £275m the previous year.
The company said it was trading in line with expectations for the full year despite inflationary headwinds.