Melrose to spin off auto business in GKN break-up

Melrose Industries plans to spin off the GKN automotive division as a new UK-listed company in a move that will crystallise the break-up of one of Britain’s oldest engineering businesses.

The FTSE 100 turnround specialist, which acquired the car parts and aerospace components manufacturer in a bitter £8bn takeover in 2018, confirmed the move on Thursday, along with its interim results to the end of June.

Under the plan Melrose will separate GKN’s automotive and smaller powder metallurgy businesses from its aerospace arm through a demerger of shares. Melrose shareholders will hold shares in the holding company.

The new auto company, one of the world’s leading suppliers of vehicle driveshafts, will aim to trade on the London Stock Exchange next year under a yet-undecided name.

Melrose will retain ownership of GKN Aerospace, a leading “tier one” supplier of airframe structures and engine components for aerospace and defence companies including Airbus and Rolls-Royce.

The demerged automotive group will account for approximately two-thirds of Melrose’s current projected revenues for 2022 of more than £7.5bn. Liam Butterworth, the chief executive of GKN Automotive, will become the head of the demerged business, with a separate chair to be appointed later on.

Simon Peckham, Melrose chief executive, and Geoffrey Martin, finance director, will take on executive director positions on the board of the demerged group while retaining their existing roles.

The move will finalise the break-up of GKN, one of Britain’s oldest engineering names that traces its roots to the late 1700s with the founding of an ironworks in south Wales.

Melrose, a turnround specialist with a loyal following in the City, acquired GKN in 2018, sparking concerns from critics it would dismantle the conglomerate. The company has argued that it spots underperforming manufacturing businesses, restructures them and sells them on. It has generated substantial returns for executives and shareholders over the years.

Peckham told the Financial Times the company had always intended to split up the businesses. The company would be returning the auto and metallurgy businesses to the stock market in a much stronger financial position.

“I would say, well done mate, we always told you we would break it up . . . No shit, Sherlock,” he told the FT. 

“From a government point of view — what more could you want than two quoted UK large businesses,” he added.

Now was the right time for a demerger. A lot of the underlying restructuring work in the auto business had been done, while the sale of its US heating and air conditioning operations, Nortek, had bolstered the group’s balance sheet substantially, Peckham said. Melrose had also delivered on its commitment to the GKN pension schemes which were now in surplus.

The restructuring of the aerospace business is lagging and will take another year.

Melrose, added Peckham, was now at a stage where “both of these businesses can have a good independent life and go and have some fun in the nicest possible way”. By trading separately the two businesses should be able to raise money on the stock market and pursue acquisitions.

Along with other industrial groups with exposure to aerospace and autos, Melrose’s shares have been hard hit by the Covid-induced downturn. At 137p, the level they closed at on Wednesday, they are down more than 25 per cent since the start of the year. They were trading above 250p at the end of March 2018 when Melrose won the takeover battle for GKN.

The company believes it can triple the profits of the aerospace business and double those of the auto unit.

Melrose sees opportunities to consolidate in the automotive sector in particular, as suppliers come under greater pressure amid the shift towards electric vehicles. About half of the new orders in GKN’s driveshaft business are for parts for electric models, which are made in the same factories as those that go into engine-driven cars.

The company said it expected 45 per cent of its work by 2025 to be for electric vehicles, which carry higher margins than its traditional contracts.

Adjusted interim results to the end of June showed revenues of £3.9bn, marginally up from £3.7bn in the same period the year before. Adjusted profit before tax in the six months was £128mn. Statutory results showed a pre-tax loss of £358mn, an increase from a loss of £275mn in the previous year.

The company said it was trading in line with expectations for the full year despite inflationary headwinds.