GKN reaps rewards of change in direction

[TonyGosling]

GKN reaps rewards of change in direction
https://www.ft.com/content/6da2ba98-4d9f-11e0-85e4-00144feab49a

Michael Kavanagh MARCH 13, 2011 Print this page
In a large industrial shed close to the Severn bridges near Bristol, what looks like a large knitting machine is delicately laying threads of what resembles lengths of old C90 audio cassette tape on to a large spindle.

The production and assembly plant being developed by GKN to supply key wing structures for the Airbus A350 is using state-of-the-art carbon fibre fabrication techniques.

The aim is to keep GKN both literally and figuratively at the leading – as well as trailing – edge of aerospace manufacturing.

The investment represents a remarkable inversion of the usual pattern of large British industrial land use.

While many former factory sites have been demolished or remodelled to become staple retail parks or distribution centres for imported goods, GKN’s latest factory is taking shape in a shed originally built speculatively by Walmart to become a major warehouse for its retail network.

The carbon fibre spars being produced at the Avonmouth site, alongside similar components for military jets, are the key load-bearing parts on to which are then mounted the flaps and landing gears which must deal with the huge stresses created as one of the next generation of passenger aircraft hits the ground at journey’s end.

Frank Bamford, vice-president of business development and strategy at GKN Aerospace, explains that the weight saving involved in migrating aircraft parts from metal to carbon fibre fabrication may range from 5 to 10 per cent. Although that may sound modest to a lay person, the fuel savings are substantial over the lifetime of an aircraft. Just as crucial are the reduced costs offered through savings in maintenance and the overhaul of fleets thanks to reduced fatigue and lower risk of corrosion from water vapour.

GKN’s continued push to expand its aerospace exposure near Bristol is building on its model of embedding itself as a risk-sharing, collaborative tier one supplier to aircraft and helicopter makers, and borrowing from the just-in-time lean-manufacturing model best exemplified by the automotive industry.

In the global engineering landscape, original equipment manufacturers (OEM) such as Boeing, Airbus, BMW, Jaguar and Audi, contract out large elements of manufacturing and assembly to companies such as GKN as they continue to move away from the vertical integration of manufacturing favoured by leading car and aircraft makers in previous decades.

This month Sir Kevin Smith, chief executive of the FTSE 100 company, unveiled full-year results which saw GKN move solidly back into the black following painful restructuring caused by the global downturn in car production.

He cautioned that demand in aerospace could remain flat for the current year, before an expected upturn for the sector, which is expected to take GKN, best known for its power transmission systems and other components used in 40 per cent or the world’s automotive output, further into the aviation segment.

This rebalancing of GKN’s customer base towards aerospace under the leadership of the former BAE Systems executive should come as little surprise. Sir Kevin has previously pointed to the higher potential margins available in aerospace compared with the automotive sector. “Margins are up from 3.4 per cent to 7.6 per cent, while they had been around 4.7 per cent before the downturn,” he says. “Margins are now higher than in the years before the recession.”

Over the long term, the key to GKN’s strategy of improving profits is a move away from producing parts “to plan” towards working closely alongside OEMs, collaborating on improving design, risk-sharing on building manufacturing capacity and even taking on elements of production from key global customers.

GKN’s acquisition of its Filton plant from Airbus for £136m ($219m) in 2009 sees its staff carrying on sharing canteen facilities with Airbus’s continuing business at Filton, the famed hub of British aircraft making where Concorde was developed and manufactured. BAE Systems and Rolls-Royce are also large presences on the site.

“It’s a key investment for us,” says Sir Kevin, deepening GKN’s global footprint as an aerospace supplier. It is a supplier on the Northrop Grumman unmanned combat X-47B aircraft being developed for the US Navy, which completed its maiden flight in February.

The factory takeover – and subsequent expansion at nearby Avonmouth – also follows a pattern under which GKN has in the past acquired people and plant from GM, Nissan and Fiat in the automotive sphere.

The troubled histories of Delphi, the car parts maker spun out from GM in 1999, and Visteon, the auto component supplier spun out of Ford a year later, suggests that investments in tier one suppliers serving OEMs keen to abandon vertical integration in manufacturing do not always go to plan.

But analysts appear content that both main divisions of GKN command valuable market positions.

Andrew Gollan, analyst at Investec, argues that there is good momentum across GKN’s cyclical businesses to support further profits growth as a company whose rating trails international peers by 20 per cent. On a sum-of-the-parts valuation, he estimates that GKN’s aerospace business is worth £1.7bn, compared with the £1.97bn value he puts on its automotive driveline business.

Post-recession, GKN’s headcount is up from 38,000 to 40,000 although the bad news for UK workers is that many of the new jobs being created by GKN – along with its domestic engineering peers – continue to drift to emerging economies.

In spite of that, several hundred jobs are expected to be created through GKN’s investment at Filton.

And as Mr Bamford argues, the large capital investments involved in aerospace manufacturing make job costs relatively unimportant when deciding where to locate plants.

British workers are adept at dealing with the ever-increasing pace of complicated, re-invented, manufacturing processes – and on an international stage they remain a competitive resource, he argues.

[TonyGosling]

MPs call for government to block Melrose's £8bn hostile takeover of GKN
UK engineering group’s role in making military aircraft parts offers national security grounds to halt deal, say its opponents
https://www.theguardian.com/business/2018/mar/29/gkn-shareholders-acce pt-melrose-takeover

Rob Davies and Angela Monaghan
Thu 29 Mar 2018 19.34 BST First published on Thu 29 Mar 2018 16.02 BST

One of Britain’s oldest engineering firms is to be taken over by a company that has been labelled an asset-stripper, prompting calls for the government to block the £8.1bn deal on national security grounds.

GKN, which was founded in 1759 and has 59,000 staff including 6,000 in the UK, succumbed to a hostile bid from Melrose after a lengthy and sometimes acrimonious corporate tussle that has spilled over into the political arena.


What's the controversy over Melrose's hostile takeover of GKN?
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Melrose, which buys underperforming firms to cut costs and sell on at a profit, appealed directly to GKN shareholders after the company’s board rejected two bids, narrowly winning their approval at a vote on Thursday afternoon.

Investors’ blessing for the takeover signals an end to the independence of a 259-year-old engineering firm that provided the iron for the construction of Britain’s railways and produced Spitfires during the second world war.

Business secretary Greg Clark said he would consider calls from MPs and trade unions to intervene on national security grounds, given GKN’s role in making components for military aircraft including the Lockheed F-35B fighter jet.

Jack Dromey, the Labour MP leader of a group of 16 politicians who wrote to Clark urging him to halt the deal, said the buyout of GKN by Melrose was a “bleak day for British industry”.

Liberal Democrat leader Vince Cable called for takeover rules to be strengthened to prevent “short-term speculators” snapping up shares in buyout targets in order to vote for a deal and pocket the profits.

The acquisition of GKN, which began life as an ironworks near Merthyr Tydfil, is the largest hostile takeover in the UK since US firm Kraft bought Cadbury in 2010.

That deal led to Cable, then business minister, calling for a “Cadbury law” to stop hedge funds and other short-term investors influencing takeovers.

Christopher Miller, the chairman of Melrose, said he was “delighted and grateful” after narrowly winning the shareholder vote with 52.4% of investor support, just above the required 50.1% threshold.

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Melrose has consistently denied that its model of buying up businesses to sell on amounts to asset-stripping.

It has made legally binding promises to keep GKN’s UK headquarters and retain a British workforce, maintain research and development spending and refrain from selling its aerospace business for at least five years.

“Let me assure you that GKN is entering into very good hands,” said Miller, a protege of Lord Hanson, the 1980s wheeler dealer who built a corporate empire with a number of aggressive takeovers.

GKN’s directors said on Thursday that it still believes that the deal “fundamentally undervalues” the company but that it now had no choice but to recommend investors sell their shares.

Dromey said the government should not allow Melrose to complete the takeover.


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He said: “Today is a bleak day for British industry. The takeover by Melrose makes a mockery of any talk by government of an industrial strategy.

“Britain’s takeover rules are in desperate need of reform. Yet again, as in the Kraft takeover of Cadbury’s, we have seen a jewel in the crown of British industry sold off because its shares were bought up by hedge funds.”

Dromey said the deal would not have gone through if the previous coalition government had agreed to Labour’s calls to restrict investors from voting on acquisitions unless they had held shares for six months.

The proposal was designed to prevent short-term speculators such as hedge funds buying up shares with the aim of influencing takeover outcomes for profit.

“To let a 259-year-old British engineering icon like GKN be taken over by a short-termist asset-stripper like Melrose is a monumental failure by ministers,” said Dromey.

“However, the government still has the power to intervene to block the hostile takeover takeover on defence and national security grounds. It should do so in the British national interest.”

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Cable said: “The very narrow result – like Brexit – suggests that this takeover is not universally popular amongst shareholders. It seems it was only secured through votes from short-term speculators.”


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Elliott Advisors, an “activist” investor with a history of intervening in takeovers, built up a 3.8% stake in GKN before the deal, which it urged fellow shareholders to back a week ago.

Cable called for the government to change corporate takeover rules to curb the voting power of short-term investors. He added that ministers should also be able to intervene in takeovers that might affect investment in research and development.

Clark said: “During the bid, Melrose made commitments which they are bound to honour including investment in research and development and maintaining itself as a UK business.

“Now that shareholders have made their decision the government has a statutory responsibility to consider whether the merger in its proposed final form gives rise to public interest concerns in the areas of media plurality, financial stability and national security.

“This assessment will be made by the appropriate authorities and the conclusion set out in due course.”

Trade union Unite echoed Cable’s concerns and said it would be “holding Melrose’s feet to the fire” to honour its commitments to GKN but said the government should still consider blocking the deal.

Unite’s assistant general secretary for aerospace, Steve Turner, said: “This takeover has put into stark relief the inadequacy of the UK’s takeover rules which put the interests of short-term speculators over those of the workforce and long-term investors.

“We need an overhaul of UK takeover laws to strengthen the voice of stakeholders to ensure other British companies do not fall prey to corporate vultures looking to make a quick buck against the national interest.”

During a two-month takeover battle, Melrose repeatedly accused GKN bosses of mismanaging the company, while opponents of the deal warned that Melrose would carve up the business and prioritise short-term profits over long-term success.

Melrose told the Guardian that many executives within GKN had privately expressed support for the takeover. “There have been back-channels from within GKN indicating they’d welcome a new broom. We think a lot of people within GKN are really going to welcome Melrose coming in.”

Melrose typically rewards senior staff with large financial incentives if they succeed in cutting costs to extract maximum value out of businesses it can then sell on.

The deal is the largest hostile takeover launched in the UK since Kraft swooped on Cadbury in 2009 and has attracted public scrutiny from politicians and unions, as well as investors. Earlier this month, GKN’s largest customer, Airbus, said it would take its business elsewhere if the Melrose deal went ahead.

Melrose first expressed interest in buying GKN in January. Subsequently GKN’s management revealed plans to merge its automotive business with the US firm Dana, in an attempt to fend off the hostile approach.