GKN has endured some tough examinations in recent weeks. In January, Melrose posed it difficult questions with a £7bn hostile bid. But, as GKN’s new boss, Ann Stevens, arrived, she found herself in the position of a student sitting a mock A-level on a single night’s revision. Yesterday, her exam script — in the form of GKN’s latest results and strategy — was released. And it did give the impression of a candidate trying to get everything down on paper before time runs out. For City examiners, then, the question is: did GKN do enough to avoid an F?
Question 1: Simplify the equation [GKN Driveline division — GKN Aerospace division] = 423p bid + x. Explain your reasoning.
Answer: Demerging the Driveline division from the Aerospace division can quickly deliver more value to shareholders by removing the so-called conglomerate discount that has prevented a realistic sum of the parts valuation, as a diversified strategy put off both auto and aero investors — but this can be unwound in 12-15 months in such a way that the separate businesses are rerated to reflect their appeal to two distinct universes. One analyst says the answer is 500p-550p.
Examiner’s comments: Candidate has identified the factors — but rushed at the answer rather breathlessly. Where is reasoning behind 12-15 months or 500p-550p? Model answer suggests trying to multiply both sides of equation before demerging.
Question 2: To what use may GKN’s powder metallurgy be most usefully put in the automotive industry: a) reducing weight in transmission systems; b) boosting valve performance; c) raising £2.5bn to bung to shareholders?
Answer: c) Powder metallurgy can deliver a 10.6 per cent margin — the best in the group. But 100 per cent of £2.5bn sale proceeds may transmit more to shareholders pockets than the 57 per cent of “non-core” sale proceeds promised by a rival bidder.
Examiner’s comments: Candidate pivots effortlessly to short-termist agenda. Textbook answer.
Question 3: Which is worth more — £150m added to GKN’s pension scheme in a demerger process, or £150m put in by a new owner up front?
Answer: That is a trick question. £150m up front is not necessarily worth more because a new owner would need to bolster the pension again on selling out to a buyer with weak balance sheet.
Examiner’s comments: Candidate makes fair point, but ignores the fact the same issue arises if a demerger becomes a trade sale to new buyer.
Question 4: What evidence is there that GKN’s declining margins can become a “boost”? Show working in margins.
Answer: Sales up 6 per cent organically; eDrive order book extended to over £2bn; aero engine partnerships to generate $13.5bn of net cash from 2018 to 2055 . . .
Examiner’s comments: Candidate appears to be answering a somewhat different question. May need to resit if the Melrose examining board lifts its pass mark to a higher level.
Persimmon’s new payout
In early 2013, George Osborne told Jeff Fairburn that the government wanted to help first-time homebuyers. Persimmon’s chief executive responded: “I did what I was asked.” He focused on churning out the small, more affordable dwellings that now make up half of its sales, writes Kate Burgess.
Elsewhere, his compliance depends on what is being asked and by whom. Five years later, with the Help-to-Buy scheme expected to end in 2021, the master builder is less co-operative. It took the resignation of his chairman, plus outraged letters from shareholders, before Mr Fairburn agreed to waive part of a share bonus. By December, the award was worth £110m, some of which he has already taken. Last week, he said he would give up about £35m of what was still to come. But this blow was softened by the board’s decision to double the cash returned to investors from 620p to £13 a share by 2021.
Other shareholders may not be so accommodating. Some are already asking why Persimmon is handing back money that could be used for expansion. Is it calling the end of the Help to Buy subsidies that have more than helped to triple the company’s shares? Perhaps Mr Fairburn’s skill is less as a master builder than in knowing how to ride the cycle — and that the good times have only three more years to run.
Why Woodford would
Fund manager Neil Woodford’s use of unquoted securities almost caused him some bother, when their value relative to his declining equity holdings neared a 10 per cent regulatory cap. Ironically, he has been helped out by other fans of illiquid holdings with ill-judged equity positions: hedge funds. Yesterday, hedgies short selling one of Mr Woodford’s favoured stocks — Provident Financial — were forced to buy when the price soared 70 per cent on news of a rights issue and regulatory settlement. No wonder Mr Woodford backed that rights issue so readily.
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