LONDON--(BUSINESS WIRE)--Elliott Advisors (UK) Limited, which advises funds (together “Elliott”) that collectively have an economic interest in the shares of GKN plc (“GKN”) representing over 3.4% of its capital, today confirms its intent to support the Melrose offer (the “Offer”), and encourages other GKN shareholders to tender their shares into the Offer.
Elliott separately sent a letter to the GKN board, outlining its rationale for supporting the Offer.
Full text of the letter appears below.
About Elliott
Elliott Management Corporation manages two multi-strategy funds which combined have over $34 billion of assets under management. Its flagship fund, Elliott Associates, L.P., was founded in 1977, making it one of the oldest funds of its kind under continuous management. The Elliott funds’ investors include pension plans, sovereign wealth funds, endowments, foundations, funds-of-funds, and employees of the firm. Elliott Advisors (UK) Limited is an affiliate of Elliott Management Corporation.
March 23, 2018
Dear Members of the Board:
We write to you on behalf of the funds that we advise (together “Elliott”), which collectively have an economic interest in the shares of GKN (the “Company”, “GKN”) representing over 3.4% of the Company’s share capital as of the date of our last published form 8.3.
The approach to our initial investment in GKN, made well before the Melrose offer (the “Offer”) was announced in January, was consistent with our approach to many of our investments. We invested a significant amount of time and resources into understanding GKN, including hiring several advisors and consultants with whom we have worked closely over several months to determine, from the outside-in, how GKN’s true potential could be unlocked for the benefit of all stakeholders. As part of this exercise, it became apparent that GKN’s recurring historical underperformance was self-inflicted. Lack of leadership and focus from top management, coupled with ineffective internal controls and flawed incentive mechanisms, allowed a dysfunctional culture to pervade most parts of the organisation over many years. The resulting weaknesses of the organisation were blatantly revealed in last October’s profit warning followed by the expeditious dismissal of the newly appointed CEO.
In the last two months since the Offer was made public, we have been engaging with the management teams and advisors of both GKN and Melrose to understand their respective plans’ implications for the Company and the value that they would deliver for its shareholders and other stakeholders. Although we have been positively surprised by your management’s ability to articulate a comprehensive improvement plan for GKN’s operations while also putting together a binding transaction to sell the driveline business to Dana Inc., we remain sceptical of the Company’s ability to deliver on Project Boost for its aerospace business.
GKN’s track-record at improving its operating margins has been unimpressive, yet your team nevertheless claims that it can deliver on its most ambitious plan ever, and that a few potentially qualified individuals can extract the company from its torpor to deliver over a 35% increase in profitability1 - an achievement unheard of in GKN’s recent history. Our belief is that this would require management’s full attention to implement profound cultural and structural shifts throughout the business, while at the same time both getting the driveline disposal over the finish line and running an efficient full-blown auction process for the powder metallurgy business.
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GKN Precedent Margin Plans |
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| Margin | 2017A | |||||||
| Plan | Target | Timeline | Result | Margin | ||||
|
Driveline
(2011)¹ |
8-10%
(7.1% in 2011²) |
2-3 Years | 14A: 8.1% | 7.0% | ||||
|
Aerospace
(2016)³ |
"Improvement"
(10.9% in 2015) |
2-3 Years | TBD | 7.8%⁴ | ||||
|
(1) Based on 2011 results presentation, (2) Excluding Getrag, (3)
Based on 2015 Q4 |
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|
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___________________________
1 Based on 14.0% core aerospace margin target as compared to 2017A core aerospace margin of 10.3%
A natural and often observed phenomenon in the face of unsolicited approaches is the ability for incumbent management teams to come up with highly attractive plans for the future of their company, which shareholders would have disregarded as pure fantasy had they been presented in the company’s normal course of action. Yet management’s unique drive and passion when under the pressure of an unsolicited acquirer sometimes manage to convince enough shareholders that its plans are achievable. Unfortunately, more often than not, once the dust settles and the pressure falls away, shareholders that decided to entrust management with their capital for another several years have to face the disappointing reality which becomes rapidly reflected in the declining value of their shares.
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Examples of Target Company Defenses Against Unsolicited Offers |
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| 1yr TSR Perf. | ||||||||||||||||||||||||
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Target / Acquiror |
Performance vs. Targets | From | From | |||||||||||||||||||||
|
(Date) |
Metrics | Target | Outcome | % ∆¹ | Offer² | Break³ | ||||||||||||||||||
| PostNL / bpost | Revenue Growth⁴ | Mid-single digit | 1.2% (’16-’17) | (76)% | (59)% | (28)% | ||||||||||||||||||
| (2016) | 2020 UCOI (m)⁴ | 310-380 | 230-300⁵ ('17: 225) | (23)% | ||||||||||||||||||||
| Perrigo / Mylan | 3yr Sales CAGR⁶ | 5-10% | (0.9%)⁷ | NM | (38)% | (14)% | ||||||||||||||||||
| (2015) | 2016 EPS ($ / share)⁶ | 7.69⁸ | 5.07 | (34)% | ||||||||||||||||||||
|
AstraZeneca / Pfizer
(2014) |
2017 Revenues ($bn)⁹ |
In line with 2013
($25.8bn) |
$22.5bn | (13)% | (37)% | (12)% | ||||||||||||||||||
| 2023 Revenues ($bn)⁹ | >$45.0bn |
$33.7bn
(curr. BBG cons.) |
(26)% | |||||||||||||||||||||
|
Metso / Weir Group
(2014) |
2014 Sales Growth10 |
Below 2013 | (5)% | NM | (25)% | (18)% | ||||||||||||||||||
In light of these observations:
- GKN’s poor track record at executing margin enhancement programs and the scale of the fundamental changes that need to be applied to the aerospace business,
- The complexity of managing a very demanding restructuring program in parallel to the divestments of two large independent businesses, and
- The disappointing outcomes of many ambitious programs conceived under the pressure of unsolicited offers,
We believe material operational and execution risks exist warranting a significant discount to GKN’s potential value creation plan for the next 12-24 months.
In contrast, we note that in supporting Melrose’s Offer, shareholders benefit from:
- A proven and tangible track record of shareholder value creation at Melrose, and
- A management team naturally aligned with shareholders and accountable for delivering on its objectives given its significant personal investment into its company
In that context, after careful and detailed consideration of the merits of both plans, Elliott has decided to support the Melrose Offer. We acknowledge GKN management’s contribution in developing the Company’s defence strategy and obtaining an improved offer from Melrose, but strongly believe that the best way forward for GKN and its stakeholders is now as part of Melrose.
Yours sincerely
Elliott Advisors (UK) Ltd
(1) Over / underperformance vs. midpoint of target range, (2) Share price performance vs. offer price adjusted for dividends and index performance. Offer price calculated based on final offer terms and share prices prior to the final offer, (3) Total shareholder return from closing price on day of deal break vs. relevant industry index, (4) Targets based on FY2016 results presentation, issued c.3 months after approach rejected, (5) revised 2020 company guidance as per PostNL 2017 Annual Report and FY2017 Results Presentation, (6) Targets from “Perrigo Confident Its Shareholders Will Reject Mylan's Value Destructive Transaction” and “Perrigo Taking Actions to Deliver Shareholder Value Far Superior to Mylan Offer” company press releases, (7) Based on Perrigo’s 2017 net sales of $4.925bn (2-Mar-18 presentation) and restated 31-Dec-15 net sales of $5.015bn (2016 annual report), (8) Perrigo EPS target adjusted for the $(2.14) impact of the Tysabri accounting change, per FY 2016 results presentation, (9) Targets as per AstraZeneca defence document “AstraZeneca issues update on strategy to deliver value to shareholders”, (10) Target based on Metso’s reiterated guidance in the Q1 2014 interim review, issued 24 days after the Weir’s initial offer
