Melrose, a UK-listed company specialising in acquisitions in the manufacturing sector, has promised to safeguard the pension schemes of engineering firm GKN as part of a bid for the business.
It follows a statement issued by the trustees of GKN’s two UK defined benefit (DB) schemes yesterday, which raised concerns about the sponsor covenant in the event of a takeover.
Melrose approached the board of GKN last week with an offer valuing the company at roughly £6.9bn (€7.8bn), which was rejected. This morning Melrose made an offer directly to shareholders that valued GKN at roughly £7.4bn.
The two GKN pension schemes had a combined shortfall of £1.9bn as of 30 September 2017, according to the trustees, based on the amount of money needed to enable both schemes to be transferred to an insurer through a buyout.
At the end of 2016 the two schemes had combined assets of £2.3bn, according to GKN’s annual report.
“Melrose has an impeccable track record of safeguarding and improving pensioners’ rights in every acquisition it has made.”
Melrose company statement
“Any material change to the corporate and capital structure of GKN would lead the trustees to reassess the strength of covenant going forward and determine appropriate funding plans based on that covenant and its associated level of risk,” the trustees’ statement said.
It added that the trustees expected “full engagement with management and with any relevant third parties… to ensure satisfactory protection and mitigation for any impacts arising from any change in the strategic direction or future ownership” of GKN, given that the schemes were “very substantial” stakeholders.
Martin Hunter, principal at consultancy group Punter Southall, highlighted that the trustees had not included figures from the scheme’s latest triennial valuation – potentially because a change in GKN’s ownership would have an effect on the sponsor covenant.
In October last year the company said it expected to reduce its annual contributions slightly following the valuation. GKN pumped £250m into the larger of the two schemes last year following its closure to future accrual.
Pension implications
Hunter continued: “It’s up to the company to go to the Pensions Regulator [TPR] for clearance [for the takeover]. TPR has strong powers to go after companies or individuals to get cash into schemes – even if the company doesn’t go for clearance it has to bear in mind these powers.
“If the deal results in a weaker covenant on day one, I would expect the sponsor to put in place more cash contributions or a contingent asset deal. I would hope Melrose has taken advice and realises the implications if it weakens the covenant.”
In a statement to the stock exchange this morning announcing its offer for GKN, Melrose said accrued benefits would be “fully safeguarded in accordance with the applicable law” and would not be affected by an acquisition.
The statement continued: “Melrose notes the statement by the trustees of the GKN Group pension schemes on 16 January 2018. The numbers published are entirely in line with Melrose’s own reading of the pension exposure at GKN and Melrose looks forward to meeting the trustees as soon as is appropriate. Melrose has an impeccable track record of safeguarding and improving pensioners’ rights in every acquisition it has made.”
According to the trustees, the schemes had more than 32,000 members as of 5 April 2017, of which 17,000 were pensioners.
Last year, the smaller of the two GKN schemes sealed a £190m buyout with Pension Insurance Corporation.
In response to this morning’s bid, Anne Stevens, GKN’s newly appointed chief executive, urged shareholders to reject Melrose’s offer and claimed that the terms “fundamentally undervalue the company”. GKN’s full statement is available here.
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