GKN and Melrose… the battle continues

21 / 03 / 2018

In my last Pensions Compass article (17 January 2018) I wrote about the pensions issues surrounding a hostile bid made by Melrose, a turnaround company, in respect of the proposed takeover of GKN.  No doubt our readers will have noticed that this topic has continued to be reported on in a rather public manner for many reasons, not least the pension issues!  It is understood that GKN’s pension schemes have a funding deficit of around £1.1bn and overall liabilities of approximately £3.3bn.  With numbers this large it is no wonder the parties have been so vocal!

On the 17th January Melrose’s offer was £7.4bn.  Since then a lot has happened:

  • the government has scrutinised the deal due to the potential impact on national security;
  • the Pensions Regulator has warned that the deal could weaken GKN’s ability to meet its pension obligations.
  • on 6 March 2018, 16 MPs wrote to the business secretary, Greg Clark, calling for the government to block the takeover due to the risk of significant job losses;
  • on 9 March 2018 GKN announced a $6.1bn deal to merge its Driveline auto business with US-based Dana, suggesting the takeover wouldn’t happen;
  • Melrose increased its offer to £8.1bn. GKN’s chairman called the offer “simply derisory”; and
  • GKN has offered to contribute £645m and reduce liabilities from £3.3bn to less than £2bn by buying out pensioners with a lump sum payment and turning over some responsibility to US suitor Dana.

Melrose had originally offered to invest £150m cash into the GKN pension schemes.  This offering was improved as part of the recent £8.1bn offer, to “up to” £1bn of contributions to the schemes, with the Chairman of Melrose saying:

“The proposal we have made to the trustees of up to £1bn of contributions under our ownership is a clear example of what Melrose does which is good for pensioners and shareholders alike and shows we are a good custodian for all stakeholders.”

However, the trustees of GKN’s final salary schemes accused Melrose of failing to address their “key concerns”, stating:

The Trustees have had a number of discussions with Melrose but have yet to receive proposals which address the key concerns that the trustees have raised.”

“The trustees have noted the comments made by Melrose in relation to the pension arrangements agreed as part of the GKN Driveline/Dana combination.  Under these arrangements, GKN will make very substantial cash contributions to the schemes which will be sufficient to make the schemes fully funded on an IAS 19 basis.”

“The Trustees have taken extensive financial, legal and actuarial advice in relation to these arrangements and have satisfied themselves that they provide appropriate mitigation to the schemes and that they are in the best interests of the schemes’ members.”

Jos Sclater, GKN finance director, added.

“A month ago, Melrose appeared to suggest that its plan to pay £150m into the pension was sufficient,” he said. “Now it appears to have unveiled a £1bn plan that would achieve less than GKN’s own agreement with the trustees, at a greater cash cost which would erode shareholder value. I think our shareholders deserve better.”

The story doesn’t stop there.  Last week, on 20 March, Melrose retorted that GKN was trying to hide the true picture with the proposals and that GKN’s proposal was insufficient when comparing the pension scheme liabilities to GKN’s earnings.

It is heartening to see the trustees and management of GNK aligned in their objectives.  They appear to be working well together, something which is always the objective but not always achievable in the world of final salary pension schemes where there are often diverging interests.  GKN and the trustees of the scheme are taking a robust approach and the media certainly suggests this might be the end of the story regarding Melrose’s hopes to take over GKN, at least for now.

This is a great example of how the trustees of the scheme have been proactive and robust in negotiations.  Sometimes trustee boards struggle to deal with conflicts of interest and feel, for want of a better expression, bullied by the sponsoring employer, particularly in respect of corporate transactions.  Hopefully this example will help trustee boards to approach negotiations confidently and with focus.