Stocks in Focus: Melrose

Thursday 13 September 2018

Earlier this year, Melrose acquired the much larger British manufacturing firm, GKN, in a controversial 8bn takeover.

Some commentators described the hostile takeover as opportunistic, suggesting the deal materially undervalued GKN's assets at a time when the management team were struggling to improve margins and encumbered by a glaring pension deficit. On the other hand, Melrose is renowned for buying struggling companies and turning them around before selling them on for a profit.

This buy-improve-sell strategy does not always sit well with long term investors. However, there is no denying that the Melrose management team have a good track record, having delivered total shareholder returns of around 3000 per cent since listing in 2003. Critics of Melrose's strategy argue that these returns have been delivered by improving margins rather than growing earnings. In turn, this margin improvement is often partly achieved via controversial measures such as cutting the workforce, which could generate significant backlash within GKN. Having said this, Melrose has promised to continue investment into the company at 2.2 per cent of revenue per year, which will abate some concerns.

Melrose announced interim results on Thursday 6 September, which included 73 days of ownership of GKN and substantial costs involved in the transaction. The board was happy with progress and investors reacted positively to the news, reassured that Melrose had not found any cause for concern in the subsequent review since owning GKN's assets. Looking forward, investors will be anticipating the first evidence that Melrose is starting to deliver the margin improvements that it has targeted for GKN's assets.

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