GKN shareholders may now regret not asking of bigger slice of Melrose pie

Latest figures and outlook suggests investors rolled over too cheaply, delivering takeover bargain in 2018

The grumble here in 2018 about Melrose’s controversial £8bn hostile takeover of GKN didn’t relate to the buyer’s supposed status of private equity-style vulture. That easy caricature has never quite fitted Melrose, a company that, yes, aims to sell everything it buys within five years, but also tends to invest heavily as well as cut costs.

Rather, the point about the takeover was that a majority of GKN shareholders rolled over too cheaply and delivered a bargain to Melrose. That analysis was threatened when the pandemic clobbered both of GKN’s core markets – automotive and, especially, aerospace. But, now the economic weather is improving, the original turnaround script looks intact. It’s just been delayed a bit.

Beyond a statutory loss, Thursday’s “ahead of expectations” half-year numbers showed topline profit of £223m, suggesting the City’s forecast of £450m for the full-year is easily achievable. In automotive – drive trains and so on – orders have been depressed by the industry-wide shortage of chips, but that factor won’t last for ever. A bumper 2022 when pent-up demand can be satisfied is possible.

Aerospace looks a slower burn, but the GKN operations are usefully skewed towards narrow-body aircraft, where the recovery in the short-haul market is stronger than at the long-haul, wide-body end. After a round of rapid cost-cutting, Melrose hasn’t budged from its target of 10% operating margins in both main divisions.

Add it all up and it requires little imagination to see how the GKN business as a whole (the other division is a smaller powder metallurgy operation) will be making £1bn of topline profit at some point. Meanwhile, GKN’s pension scheme has been repaired, with the deficit down from almost £1bn to £150m, removing one major financial complication. And most of Melrose’s non-GKN businesses have been sold at decent prices.

Thus those GKN shareholders who accepted Melrose equity in the 2018 deal are probably happy enough. By rights, though, they should have demanded a larger slice of the pie.

CMA still sees a problem, but maybe it’s missing the point

The Competition and Markets Authority’s obsession with JD Sports’ takeover of Footasylum is bizarre. From the scrutiny this deal has received, you’d think JD had bought Nike, rather than paid a piddling £90m for a chain that was struggling in independent form.

JD seemed to be winning the argument when the CMA was told by its appeals tribunal to look again at its decision to block the deal, but the competition boffins still see a problem. Footasylum shoppers “could find themselves facing higher prices, fewer discounts and less choice of products in store”, they say.

Well, perhaps, but they could also find a 70-store chain that wasn’t providing much competitive bite in the first place. Footasylum shareholders were happy to sell to JD at half the float price in 2019, which shows how long this saga has been running.

Peter Cowgill, JD’s bonus-hungry boss, doesn’t always elicit sympathy, but he’s surely right when he points to the determined efforts of Nike and Adidas to bypass retailers and sell directly to consumers as a relevant factor. Yes, that’s a new and serious competitive force in the market for trainers and sporty kit. Both JD’s and Footasylum’s customers surely know how to shop online disloyally.

If a quiet August can explode your profits forecast, why stick your neck out in July?

Misplaced optimism is par for the course in the whizzy world of spread betting on financial markets, but it’s usually the punters, rather than corporate managements, who end up looking silly.

Peter Cruddas, CMC Markets chief executive and majority owner, is one of the wealthiest individuals in the City, so is obviously no fool, but why on earth did he tell investors at the end of July that he was “confident in the outlook” and predict profits “in excess of £330m” this financial year? Five weeks later that forecast has been revised to £250m-£280m, which is one hell of a downgrade.

What happened? The way CMC tells it now, the clients are bored by current dull stock markets and are trading less. The explanation is entirely coherent, though one might also wonder whether the working-from-home brigade, who fuelled the boom in the early months of this year, have found other attractions (67% of retail investor accounts lose money, according to CMC’s website).

Either way, if a quiet August – hardly unheard of – can explode your profits forecast, why stick your neck out in July? At least the 27% plunge in CMC’s share price shows there are still pockets of volatility.

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