GKN has promised to return £2.5bn in cash to shareholders over the next three years in an effort to fend off a hostile £7bn approach from turnround specialist Melrose Industries.
In a highly unusual move, the FTSE 100 company fired off a volley of substantial promises to investors on future returns the day before it is due to issue its defence document.
GKN has not only promised to return cash amounting to 147p a share over the next three years, but to revive flagging margins and boost cash generation in its aerospace and automotive divisions.
It also intends to sell non-core businesses, including the US aerostructures business that led to last year’s profit warning, amounting to roughly a quarter of annual turnover.
“This strategy is expected to generate significant cash for shareholders in the short term and meaningful sustainable cash flows over the mid to long term,” said Anne Stevens, the former Ford executive who was appointed chief executive last month in the wake of Melrose’s hostile assault. “We have a plan and we are dedicated to delivering it.”
The aerospace and automotive group’s management is fighting to convince investors to reject Melrose’s offer of 1.49 shares and 81p for every one of GKN’s shares.
It has argued that accepting the offer would leave GKN shareholders with just 57 per cent of the benefit of any turnround, against 100 per cent of the proceeds should they reject the bid.
However, the relatively unknown management of GKN has so far struggled to bridge the credibility gap with Melrose, which also plans to improve and sell the group’s under-performing businesses before returning proceeds to shareholders.
Ms Stevens rejected suggestions that GKN’s promises of future returns based on successful disposals and execution, rather than an immediate payout, might not close that gap.
“This is a plan that is backed by details. Project Boost [GKN’s programme to improve cash and profit] will have over 500 initiatives,” she told the Financial Times. “There are no sacred cows . . . We have picked projects that will pay back quickly.”
GKN has promised that its standalone strategy would deliver £340m in annual cash benefits from the end of 2020 and margins of 11 per cent, up from last year’s 7.5 per cent.
These improvements exclude the impact of the £112m charge announced last year as a result of problems with understated inventory in the US aerospace business.
It also intended to make significant disposals in the next 12-18 months, accounting for roughly a quarter of current turnover, including the sale of its powder metallurgy division. Disposals would deliver a significant proportion of the cash that has been pledged to investors, the group said.
Finally, GKN promised it would pay out an average of 50 per cent of free cash flow in dividends over the next three years, while retaining an investment grade credit rating.
Analysts said the announcement on Wednesday offered “decent detail”, but one said: “The question will always be: why are you just figuring all this out now?”
Sandy Morris, analyst at Jefferies, the investment bank, said the proposals would not end the debate about which management team was better to execute a turnround. However, they did indicate that GKN’s problems were not “insurmountable”, he said.
The plan will come at a cost. GKN said restructuring charges would come to £450m. A third of this would be incurred in 2018, about 44 per cent in 2019 and the remainder in 2020.
Of this, about £134m would be invested in digitising and automating manufacturing processes. Job losses would be minimal, the group said, although some factories and warehouses outside the UK were expected to close.
The group will also implement a new incentive plan valued at £70m, to be paid out in shares if all targets are met.
Melrose attacked GKN’s proposals as “long on adjectives and promises”. It said it had “already added £1.3bn to the value of GKN and proposed a further £1.4bn on day one. In terms of value, the two proposals are worlds apart.”
The Melrose offer values GKN shares at 410p against the target’s 411p at close of trading.
Additional reporting by Arash Massoudi