Having jumped 26% on Friday following rebuffal of an ‘opportunistic’ £8bn approach from competitor Melrose Industries, engineering company GKN’s shares are 2.5% further north this morning. This after Melrose said  it is “commencing a series of shareholder meetings to discuss the proposal”. This suggests it may be looking for the nod from major shareholders to better the existing 21.7% premium offered (vs Thurs price) or take things hostile in order to seek control. In our view, probably a bit of both .

Firstly because an opening approach is rarely what is ultimately agreed to (and because 25%+ is normally required as a control premium). Secondly, the language employed by Melrose in a presentation now available on its website is highly critical, suggesting the target is “overly complex and under-managed organisation without focus which needs a fundamental change of culture and leadership”.

Much highlighting of relative share price underperformance is also clearly aimed at convincing suitor shareholders of GKN management’s failure to deliver value and that better profitability can be had within the newly proposed new structure, especially following a brace of Autumn profits warnings and change at the top and decision to split the business.

That said, GKN shares trade fresh record highs while Melrose sits 13% from its June record peak. And despite Melrose’s outperformance, markets are fully aware that past performance is no guarantee of future performance and a transaction is not without risk. While Melrose shares rose 5.8% on Friday, welcoming the potential tie-up, they are down 1% today, shareholders perhaps digesting the risk that it ends up overpaying. GKN shares may also be higher on reports that private equity giant Carlyle may be considering a counter-bid that triggers a bidding war.

Mike van Dulken, Head of Research, 15 Jan 2018