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'Air of inevitability' that GKN will be owned by Melrose, says Berenberg
Berenberg upped its price target on GKN to 455p from 365p on Monday, sticking with its 'buy' rating as it said it seems inevitable the engineer will end up being owned by Melrose Industries, after it rejected a £7bn bid last week.
GKN said on Friday that it had rejected a bid proposal from Melrose and appointed Anne Stevens as chief executive, as it announced plans to separate its aerospace and automotive businesses. It said that the bid was "entirely opportunistic and that the terms fundamentally undervalue the company and its prospects".
"The rejected 405p bid undervalues GKN, in our view, but we believe Melrose has scope to significantly increase its offer by the 9 February deadline," Berenberg said, also highlighting the potential of a counter-bid following press reports that private equity firm Carlyle might interested in making an offer.
The bank is assuming Melrose will up its offer to 455p, which indicates a further 8% upside to the GKN share price. "Given that the deal structure allows significant participation in any upside that Melrose achieves, we believe GKN management will be hard pushed to reject such an offer."
According to Berenberg, Melrose walking away is the least likely outcome. It said that previous transactions demonstrate that Melrose's management is financially disciplined and that it does not over-pay.
"If it was to make a higher offer that is again rejected by GKN, we believe the downside to GKN shares is limited to around the around 400p level (ie 4% to 5% lower), on the basis that GKN's own strategy to improve performance and separate the group suggests a similar path to realise value, including potential break-up."
There is also the possibility of a counter-bid, with Carlyle reportedly in the frame and another industrial buyer unlikely.
"We have no particular insight as to how a PE strategy to unlock value from GKN might differ from the Melrose plan. However, given Melrose's expertise in industrial turnarounds its shareholders (and the new ex-GKN shareholders) will therefore expect significant valuation upside in the years following the deal. On this basis, we suspect any private equity approach would need to be at even greater premium than whatever price Melrose comes back with."
Even if a deal between Melrose and GKN falls apart, the stock's downside is limited, Berenberg said, as it suggested investors keep hold of the stock.
At 1530 GMT, GKN shares were up 5% to 440.80p while Melrose was up 1.8% to 231.50p.