Melrose to List GKN Automotive Assets in New Listed Vehicle

– Stakeholders to obtain shares in the new company

– Melrose focuses on aerospace business

– Sale of Nortek’s last business

FTSE 100 Engineering Group Melrose (MRO) surprised the market when it learned that it would spin off most of the businesses it acquired in the controversial 2018 GKN takeover.

Shareholders will receive shares of what is known for now as DemergerCo, an automotive platform company, which will be listed separately on the main market next year.

BUY, IMPROVE, SELL

It’s fair to say that not everyone saw the industry logic in buying GKN four years ago, given its exposure to the automotive sector where big automakers tend to dominate their suppliers.

However, after a lot of hard work, Melrose has transformed both GKN Automotive and GKN Powder Metallurgy – both of which will become part of DemergerCo – into what he calls “excellent cash generators with cutting-edge sustainable technology”.

Both companies have clearly defined operating margin targets – 10% or more for automotive and 14% or more for powder metallurgy – and both will be free to pursue a “proactive acquisition strategy”.

GKN Automotive, which provides drivetrain technologies, has earned £2.6 billion over the life of the program, more than 50% of which is for full electric and hybrid vehicles.

GKN Powder Metallurgy, which manufactures metal powders and precision parts for the automotive and industrial sectors, has moved into magnets for EV (electric vehicle) motors and has “significant EV opportunities in its core business” , according to Melrose.

GKN Hydrogen Trading, a new venture which is said to have “a growing pipeline of interest”, will also be incorporated into the new vehicle.

Meanwhile, the FTSE 100 company will retain ownership of GKN Aerospace, which makes airframes, engine parts and electrical components, and will seek new takeover targets once the split is complete.

Melrose also announced the sale of Ergotron, as part of its acquisition of Nortek in 2016, for £519 million.

The deal completes the sale of Nortek’s business for over £3.1 billion, including cash generated during ownership of the business, double its initial investment.

NEGOTIATION ON TRACK

For the six months to June, the company posted sales of £3.59bn, an increase of 4.8%, adjusted pre-tax profits up 12% to £128m and a loss statutory pre-tax of £358 million.

The difference between adjusted and statutory profit is mainly due to the amortization charge for intangibles acquired through takeovers – a common feature of businesses that grow by acquisition – which amounted to £223m in the first half , as well as £154 million of charges for foreign exchange movements due to the weakness of the pound sterling.

Non-executive chairman Justin Dowley said the company had “good momentum in the first half” and was on track to meet its full-year expectations, with all businesses facing component shortages and pushing for price increases to offset inflation.

Dowley added: “We expect the full year 2022 to show good progress over 2021, and DemergerCo and Melrose to be well positioned for further success following the planned split.”

After gaining more than 5% at the open, the shares were trading down 1.5% to 135p by mid-morning.

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Date of issue: September 08, 2022