GKN takeover offer from Melrose

[Bouleversee]

My online broker has sent me details of the multi-optioned offer from Melrose which I have to decide on by March 5.

I know it's a hostile bid and the GKN Board recommends rejection on the grounds that it is opportunistic (aren't they all?) and seriously undervalues the Company, though the press articles I have read suggest that Melrose would make a better job of transforming GKN than the Company would and they seem to have a good record of turning round companies successfully..

I am inclined to sit on my hands and await further developments, though I don't want to lose my right to choose the preferred option. I am not sure whether I would do so if they get sufficient acceptances for a compulsory acquisition. What are other people planning to do?

One thing that surprised me in the letter from my ISA provider was the following: Please note that as you hold your shares in our nominee service, any "elections for the Cash or Shre Alternative may be satisfied to a greater or lesser degree than that announced by the Company." Is that normal? I am not happy about it and don't recall it being a feature in any other takeover where my shares were held by a nominee, as they mostly are these days.

[PeterGray]

One thing that surprised me in the letter from my ISA provider was the following: Please note that as you hold your shares in our nominee service, any "elections for the Cash or Shre Alternative may be satisfied to a greater or lesser degree than that announced by the Company." Is that normal? I am not happy about it and don't recall it being a feature in any other takeover where my shares were held by a nominee, as they mostly are these days.

What that means is that all the nominee holdings in GKN that your broker holds may be treated as one large one. That can mean you get something slightly different to what you would if you held independently. Most commonly there may be roundings of share numbers or cash. In some cases (and I don't know the GKN details) there may be different deals for smaller or larger numbers of shares held.

What it doesn't mean is that your broker may decide to trouser some of the proceeds!

Peter

[Alaric]

What are other people planning to do?

Interactive Investor have yet to give shareholders any options, which suggests your broker is jumping the gun a little.

[Bouleversee]

Peter Gray -

Many thanks. I have to admit that that thought had flashed through my mind. I still don't quite understand why there should be any difference for nominee holdings compared with direct holdings. However, if we are only talking about minor differences due to rounding, it's not worth worrying about.

Alaric -

I don't think they are. I read some days ago that GKN had been communicating with its shareholders. I think Interactive are always slow to tell their clients about takeovers. I also have an account with them and have complained about the fact that with recommended offers we are not informed that anything is going on till after the EGM has voted the thing through. I'd be interested to know when they do tell you about this one. My GKN shares are in my IWeb ISA but I know my son heard from Selftrade a couple of days or so ago and they have always alerted clients as soon as an offer is made..

I did read in The Times that GKN had warned that its shareholders could be forced to vote on the takeover before knowing whether the deal with be blocked by American regulators and that the deadline may need to be extended to ensure that its shareholders know what regulators were thinking but Melrose did not expect any problems. Nothing in the IWeb communication about that. A good reason to sit on one's hands till nearer the deadline, perhaps.

[Gengulphus]

Interactive Investor have yet to give shareholders any options, which suggests your broker is jumping the gun a little.

Or that Interactive Investor is being a bit slow putting their client communication about the takeover offer together - a slowness that quite a few brokers suffer from, for understandable reasons - the full RNS announcement of such an offer is generally many pages, and the formal shareholder circulars from the companies even longer (almost always 50+ pages, and it often stretches to hundreds), and the brokers generally want to get it down to a roughly-one-page client communication from which clients will correctly understand what their options are. (And they don't always get it right - I remember one occasion years ago when the broker client communication didn't quite make sense to me, I investigated what the company had said and found that the broker had got their summary of the shareholder options completely wrong in almost every detail, and quite a few occasions when the broker got specific details wrong (e.g. which of B and C shares was the income option and which the capital option in a B/C share scheme, back when there were such things).

Basically, if you want to know what your options are, I recommend not relying on brokers. Once one knows that something is going on, try to find the RNS about it, and/or google "<company name> investor relations" to find the relevant sections of the companies' websites, then see what they have to say about it. Doing that in this case gives me https://www.gkn.com/en/investors/ (which has a prominent "OFFER FOR GKN PLC" section) and https://www.melroseplc.net/investors/ (which has a not-quite-so-prominent "Proposed acquisition of GKN plc" section).

I've had a quick look at the first of those. After accepting a disclaimer (an inevitable formality these days - companies do not want to get into trouble with the US securities regulators...) I found that the original announcement of the firm offer (50 pages) was made on January 17th and the formal offer document (108 pages) was published on February 1st. The latter contains an expected timetable on page 13 - a bit of study of it says that the "First Closing Date" is March 9th, with an explanatory footnote against it saying "The Offer is initially open for acceptance until 1.00 p.m. on 9 March 2018. Melrose reserves the right (but shall not be obliged, other than as may be required by the City Code) at any time or from time to time to extend the Offer after such time."

Brokers will generally want client responses a few working days earlier, maybe up to a week - so there should be at least a couple of weeks to go. And in practice, takeover offers usually get extended a few times (I believe the main case when they don't is if the offeror gets so few acceptances that it's clear it won't go through, so that the offeror gives it up as a bad job). And they must be extended at least once more when they "go unconditional" (basically when it becomes definite that they are going through) - I believe that's the main thing that the "other than as may be required by the City Code" is about.

And just to be clear, all of that is for a traditional takeover offer like this one, which is an offer made to the shareholders individually and has multiple possible outcomes resulting from various levels of shareholder acceptances. There is another pretty common form, namely a scheme of arrangement, which is basically an offer made to the company that it gets cash and/or shares to distribute to its shareholders in return for it reorganising its share capital to put it all in the hands of the offeror. For that form, the outcome is determined by shareholder vote, effectively about whether the company accepts the offer, not by individual acceptances, and as a result it only has all-or-nothing outcomes.

Gengulphus

[Bouleversee]

Thanks, Geng. So what happens if one accepts but not enough others do and they decide to up their offer? Does one still get the higher price and all the options>? And from a tactical point of view, if one approves of the takeover in principle but, having been told the offer undervalues the company, would like better terms, should one accept anyway or hang on and risk losing the offer altogether? I personally think Melrose are likely to make a better job of turning round the company than the existing management but am not really competent to evaluate the offer, but it does have the sweetener of the Melrose shares and one could always reinvest the cash in more of those.

[Gengulphus]

I did read in The Times that GKN had warned that its shareholders could be forced to vote on the takeover before knowing whether the deal with be blocked by American regulators and that the deadline may need to be extended to ensure that its shareholders know what regulators were thinking but Melrose did not expect any problems. Nothing in the IWeb communication about that. A good reason to sit on one's hands till nearer the deadline, perhaps.

It doesn't make sense - if regulators block the deal, it doesn't go ahead regardless of how shareholders vote, so shareholders might as well vote on the assumption that the regulators aren't going to block the deal: if that assumption is correct, they've voted on the correct basis; if it's wrong, their votes aren't going to make any difference anyway...

But in any case, it sounds garbled, because with a traditional takeover offer like this one, GKN shareholders don't get to vote on it at all, just to accept the offer as individuals - or choose not to accept it. Melrose shareholders get a vote on it: if that vote goes against the offer, it doesn't get through. But GKN shareholders just get to accept it or not: it is perfectly possible for the outcome to be that Melrose acquires the shares of GKN shareholders who choose to accept and doesn't acquire those of GKN shareholders who choose not to accept. (There are various reasons why that tends not to happen in practice, but it can and occasionally does, and in my non-HYP investing, I've actually once been involved in one when Tesco took over Dobbies Garden Centres a bit over a decade ago: they only got about 60-70% of the shares on their first attempt, then came back a year or so later to try again and succeeded in getting all of them on that second attempt.)

So there's been some garbling, though whether it's about votes as opposed to acceptances, or about GKN shareholders as opposed to Melrose shareholders, I don't know - and by the way, I also don't know who has done the garbling...

Gengulphus

[Gengulphus]

Thanks, Geng. So what happens if one accepts but not enough others do and they decide to up their offer? Does one still get the higher price and all the options>? And from a tactical point of view, if one approves of the takeover in principle but, having been told the offer undervalues the company, would like better terms, should one accept anyway or hang on and risk losing the offer altogether? I personally think Melrose are likely to make a better job of turning round the company than the existing management but am not really competent to evaluate the offer, but it does have the sweetener of the Melrose shares and one could always reinvest the cash in more of those.

OK, though I should warn you upfront that this gets more than a bit long and complicated!

* First, the Takeover Code (also known as the City Code) requires that a traditional takeover offer has an "acceptance condition": if that condition isn't satisfied, the whole offer is basically null and void, with neither Melrose nor any shareholder who accepts the offer being bound by it - or more briefly, the offer doesn't go through. That condition must be at least that the offeror has received enough acceptances that if the offer does go through, they'll end up with more than 50% of the votes (normally more than 50% of the shares, but there are occasional exceptions with multiple classes of share having different numbers of votes per share - e.g. Schroders). It can be - and usually is - set quite a lot higher, though the offeror can - and usually does - reserve the right to reduce it (though not below the minimum) if they want.

* As for any other condition, the acceptance condition has to be satisfied before any shares change hands, so the offeror can (and again usually does) extend the offer to see whether more acceptances come in if it hasn't yet been satisfied by a closing date. Or of course they might reduce the acceptance condition - but they might be unable to because of its minimum, or unwilling to because they consider the risk of being left with just partial control of the company too high. There are however limits imposed by the Takeover Code on how long an offer can go on being extended, basically to avoid leaving companies in a permanent state of uncertainty if the offeror is determined neither to back down nor to improve their offer in the face of there being enough existing holders who regard the offer as unacceptable to prevent it going through...

* Once the acceptance condition and all other conditions are satisfied, the offer 'goes unconditional' and all shares whose owners have accepted the offer become owned by the offeror, and the due payment for them becomes owned by their former owners (it usually takes a week or two to come through, but that's like the settlement period for a normal share sale - the old owner immediately becomes entitled to the proceeds, it's just that the admin takes some time to complete). And since the minimum acceptance condition means that the offeror has shares with more than 50% of the votes, the offeror takes control of the company - except on matters that require shareholders to pass a special resolution, since passing a special resolution requires a 75%-in-favour shareholder vote. In addition, the Takeover Code requires that the offeror extends the offer at this point, basically to give all shareholders who haven't accepted a chance to change their minds. I believe it also ceases to impose the limit on how long the offer can continue to be extended, and quite often the offeror extends it "until further notice".

* If the offeror gets enough acceptances to have 75% of the shareholder votes, they can even pass special resolutions. That basically means that they can do anything they like with the company, except for things that aren't allowed by company law - for instance, company law requires that all holders of the same class of share are paid dividends on the same basis, so they cannot just arbitrarily decide that they'll pay a dividend to themselves only.

* If the offeror gets acceptances from shareholders holding 90% of the shares they tried to acquire by the offer, company law entitles them to compulsorily purchase the rest, on the same terms as the offer. Note that they don't make the offer about any shares they held before they made the offer - you cannot offer to buy something from yourself! - so that can mean getting up to somewhat more than having 90% of the shareholder votes. For instance, if the offeror owned 20% of the shares beforehand, they make the offer to the holders of the other 80%, and they have to get acceptances from 90% of that 80% to reach the point of being able to compulsorily purchase the rest, i.e. from holders of 72% or more of the shares. So they have to reach the point of owning their initial 20% plus a further 72%, or 92% of the shares. (By the way, the observant might notice that I've shifted from talking about percentages of the votes to those of the shares - the reason is that the two almost always mean the same thing, and that I don't actually know exactly what the rules about compulsory purchase are when multiple classes of share are involved.)

So basically, a traditional takeover offer can go through up to four stages:

1. Not (yet) going through - if it stops here, no-one gives up their shares in return for the offered consideration.
2. Going through with offeror having >50% but <75% control - if it stops here, only those who accept give up their shares in return for the offered consideration.
3. Going through with offeror having >=75% control but not enough acceptances for compulsory purchase - if it stops here, again only those who accept gives up their shares in return for the offered consideration.
4. Offeror can compulsorily purchase the remaining shares, so (assuming they do) they end up with 100% control and everybody else gives up their shares in return for the offered consideration.

Note that not all of them will necessarily happen. For instance, in this case Melrose have set their acceptance condition high enough that if it is satisfied, the offer will go straight from stage 1 to stage 4 - unless they decide to reduce it. Which is actually quite a common way of going about such an offer - and equally, it is quite common that the offeror does subsequently reduce the acceptance condition. (Whether to do so is quite a difficult decision for an offeror - the main arguments for and against doing so are that reducing the acceptance condition increases the inducement to existing holders who have not yet accepted to do so, but it also increases the risk of being left with control and the obligation to pay a large chunk of the offered consideration, but not 100% control. And having or not having 100% control can be a major factor in whether the offeror can get the funding they need for the offer.)

The difference between stages 2 and 3 lies in what pressure the offeror can place on existing holders who haven't yet accepted to decide to accept after all. Stage 2 already allows quite a bit of pressure - in particular, with >50% control the offeror can decide that the company is not going to pay dividends, and maybe additionally that it's going to announce major expansion plans and a rights issue to fund them (a particularly effective bit of pressure if the offeror has deep pockets to enable them to take up their rights and the other existing holders don't, so that a rights issue would end up increasing their percentage in the company).

But stage 3 allows them to delist the company - delisting being something that requires a special resolution to authorise. And delisting is something that the offeror probably wants (no point in having a market listing and its associated costs and regulations if you want 100% control of the company) and other shareholders are unlikely to: the threat of finding oneself owning shares in a non-dividend-paying company is bad enough, the threat of not even being able to sell the shares at all easily makes it far worse!

Anyway, that pressure means that there is generally a surge in acceptances after an offer has gone unconditional, and that surge is usually self-reinforcing - more acceptances creates greater pressure to accept and/or a greater impression that the offer going through to compulsory purchase and 100% control by the offeror is inevitable, which prompts more acceptances. So usually, once a traditional takeover offer has gone unconditional it proceeds inexorably up to the compulsory purchase stage - and that's particularly true if the offeror gets up to 75% control. But not quite always - as I've said, I've once been involved in one that didn't (though a second attempt a year or so later did), and I've seen reports of others.

So what's a HYPer to make of all that? My views are that as long as the offer hasn't gone unconditional, the arguments both for and against accepting are generally pretty minor, with the most important probably being that accepting commits you: once the offer has been made and you've accepted it, both you and the offeror are contractually committed to going through with it if and when all of its conditions are satisfied, even if e.g. a better offer subsequently emerges from another offeror, or the market price rises above the offer price because of rumours that such a better offer is on the cards. It's possible that the offer allows acceptances to be withdrawn, and some do - but not all, and those that do often place various conditions on withdrawing acceptances, e.g. that a competing offer must be at least 10% better before it provides an adequate excuse for withdrawing acceptances. So at the very least, accepting an offer on the basis that one can withdraw one's acceptance later requires a careful examination of the offer to see what withdrawals it permits - whereas not accepting it on the basis that one can decide later to accept it after all is pretty safe, provided only that one is able to (and does!) keep an eye open for the offer going unconditional.

A better offer is very unlikely after the offer has gone unconditional, as the original offeror has now got >50% control of the company and so any other offeror needs to win their acceptance to stand any chance of success. I don't know what the Takeover Code has to say about the original offeror increasing their offer after their original offer has gone unconditional and they have actually acquired shares under it, but I strongly suspect it either forbids it or requires the improvement to be retrospectively added to the consideration paid for the shares already acquired - the Takeover Code is pretty strong about its principle that a takeover bid must offer all holders (of the same class of shares) the same consideration per share. In any event, I've never encountered a case of it happening - a fair number of cases of offerors increasing their offers before they've gone unconditional, yes, usually in response to a competing bid, but not afterwards. Increases before the original offer has gone unconditional are of course no problem, as in essence the original offer has disappeared without getting to the stage of that anyone is committed to going through with it.

The Takeover Code does allow the original offer to be followed through to its conclusion, and if that conclusion was that the offeror failed to get 100% control, the offeror to make another offer after a reasonable gap - without checking the detail, I think it would be six months or a year. That normally applies when an offer has failed completely, but can also apply when they've succeeded in getting >50% but <100% control - that's what happened in the case of Tesco taking over Dobbies Garden Centres around a decade ago, which is the case I was mentioned above that I'd experienced of a traditional takeover offer going unconditional not proceeding to the compulsory purchase stage. What happened there was that a minority shareholder acquired over 25% of the shares and refused to accept the original offer, blocking Tesco from being able to get to the 75% control level. Interestingly, the second attempt a year or so later involved a somewhat lower offer and nevertheless was accepted by the minority shareholder - the reason being that in the meantime, Tesco had demonstrated that they could instigate a rights issue that would leave them with at least 75% control because they could afford to take up their rights and the minority shareholder couldn't, and once they'd done that, they could delist the company. They never actually launched the rights issue, just announced that they planned to alongside the new takeover offer, got a legal challenge from the minority shareholder to whether they were legally permitted such a rights issue and when the courts turned down that legal challenge, the minority shareholder gave in and accepted their new offer...

Anyway, as I indicated above, I reckon the biggest factor for a HYPer to take into account when faced with a traditional takeover offer that hasn't gone unconditional is usually that once they've accepted, withdrawing their acceptance might prove difficult even if a better offer emerges. In particular, their broker is likely to put their shares into escrow until the offer does go unconditional, is abandoned by the offeror or they successfully withdraw it: while in escrow, they cannot accept any other offer for the shares, nor sell them on the market. (That obviously doesn't apply to certificated holdings, by the way, but there is an equivalent: the share certificate has to be submitted with their acceptance for the acceptance to be valid.)

Because of that, my default policy as a HYPer would be not to accept a traditional takeover offer for as long as it hasn't gone unconditional. As long as that's the case, I'm guaranteed to get another chance to accept if it does go unconditional, and guaranteed that I won't get the offer regardless of whether I accept if it doesn't, so I don't lose out either way and might as well keep the freedom to change my mind. That's only a default policy - i.e. I would change it in some circumstances, but I would need to have a reasonably strong reason to change it. One example of such a reason would be if I strongly wanted the takeover to go ahead, strongly enough to want to add my shares to the acceptances and so add a little bit to the likelihood that the acceptance condition would be satisfied - but given how miniscule a percentage my HYP shareholdings are of any of the companies' shares in issue, I would have to very strongly want it for that to outweigh the likely loss of freedom to change my mind... (Note this doesn't necessarily apply to my smallcap shareholdings - this is HYP-specific stuff for me!) Another is if I could foresee a fairly high likelihood that I wouldn't be paying attention if/when the offer went unconditional - if I were to fail to pay attention at that point, for long enough to miss the end of the offer extension announced then, it might not be extended beyond that.

Equally, my default policy as a HYPer would be to accept a traditional takeover offer as soon as it does go unconditional. From that point onwards, I can guarantee getting the offer by accepting reasonably promptly, and I risk not getting it if I fail to do so and the offeror decides to abandon it short of getting 100% control - and it's pretty likely that I not only won't get the offer in that case, but also will be left as a shareholder in a company that ceases to pay dividends and very possibly delists, with a majority shareholder whose interests are not mine! Again, that's a default and could be changed for sufficiently good reason - but basically, I'd need to be able to face the prospect of becoming such a shareholder with equanimity before I would refuse to accept once the offer had progressed beyond stage 1 above. (I'll add that I have refused to do so on occasions in the past, but that was many years ago and before I properly understood what I was doing. Also, I have experienced one takeover offer since I knew what I was doing where I wanted to hang on to my shares badly enough that I would have seriously considered refusing to accept to the bitter end on the grounds that the one hope of keeping them was that it wouldn't get to the compulsory purchase stage, but that one was done by a scheme of arrangement rather than a traditional takeover offer and so the question of acceptances didn't arise for it.)

So to sum up my usual approach to traditional takeover offers for my HYP shares, it would be not to accept for as long as the offer doesn't go unconditional, and to accept if and when it does. Very brief compared with the above, but I feel one does need to understand the reasons, especially as there are exceptions to both parts of it and understanding the reasons is essential to seeing where those exceptions might lie.

Finally, a warning about nominee brokers in this context: the offeror and the company won't assume that the offer has been accepted without the registered shareholder explicitly accepting, so if you do nothing with regard to a certificated or CREST shareholding, you definitely haven't accepted. But with a nominee broker shareholding (which includes all ISA shareholdings in particular) it's the broker's nominee company that is the registered shareholder, and I've come across a case where the broker's terms & conditions said that in the absence of explicit instructions from the client, they would accept traditional takeover offers in some circumstances (IIRC, it was if the offer was recommended by the directors of the company being taken over). If that happens, it is something you agreed to back when you became a client of theirs and agreed to their terms & conditions - but you might not have realised that was what you were doing, not have noticed that detail of what you were doing, and/or have noticed it but forgotten it since. The moral of which is that when you get a broker notification that you can accept a takeover offer, make certain you look at what it says will happen if you fail to respond: it could be that it will end up being accepted unless you explicitly tell the broker not to accept with regard to your shares.

Gengulphus

[Bouleversee]

Thank you for going to so much trouble, Geng. You must have been up all night. I'll try to digest it all.

[Alaric]

Or that Interactive Investor is being a bit slow putting their client communication about the takeover offer together - a slowness that quite a few brokers suffer from, for understandable reasons - the full RNS announcement of such an offer is generally many pages, and the formal shareholder circulars from the companies even longer (almost always 50+ pages, and it often stretches to hundreds), and the brokers generally want to get it down to a roughly-one-page client communication from which clients will correctly understand what their options are.

Interactive Investor are now asking holders of GKN for instructions.

Four options

reject takeover
accept mix of shares and cash as described
maximum shares
maximum cash

[Bouleversee]

Or that Interactive Investor is being a bit slow putting their client communication about the takeover offer together - a slowness that quite a few brokers suffer from, for understandable reasons - the full RNS announcement of such an offer is generally many pages, and the formal shareholder circulars from the companies even longer (almost always 50+ pages, and it often stretches to hundreds), and the brokers generally want to get it down to a roughly-one-page client communication from which clients will correctly understand what their options are.

Interactive Investor are now asking holders of GKN for instructions.

Four options

reject takeover
accept mix of shares and cash as described
maximum shares
maximum cash

What's their deadline for reply?

I read somewhere today that the consensus of opinion is tht the bid will succeed.

[Alaric]

What's their deadline for reply?

6th March.

[Bouleversee]

So that's 1st March Selftrade, 5th March Iweb, 6th March Interactive Investor and 9th March for certificated holders, unless the offer is extended.

[Bouleversee]

Melrose 2017 results out today:

https://www.investegate.co.uk/melrose-i ... es%20Alert

Any views on how these should influence our choices re the proposed GKN takeover?

Strange that the govt. should be considering blocking it when they did nothing to prevent the ARM takeover.

[Bouleversee]

Just received another alert re the above:

https://www.investegate.co.uk/gkn-plc/g ... LC%20Alert

So is this how this incentive plan works: You allow the company to stagnate, award yourselves options at the consequent lower price, allow it to stagnate a bit more till an "opportunistic" bid comes along which causes a dramatic increase in the share price, advise shareholders to reject, take up your options at the lower price, knowing that the takeover is likely to go through, and await your profits? I am just guessing here; I haven't time to check out the details of the scheme. Of course, if shareholders take their advice and the bid fails, the s.p. might collapse again but they probably know which way the wind is blowing. Cynical, moi?

[Bouleversee]

On the other hand, an article in the FT headed "Corbyn prepares swipe at hostile Melrose bid for GKN" says that in a speech today Corbyn will make it clear that Labour will do something to stop British companies being taken over by asset strippers.

[Reebus]

I must admit that although I did register with Lemonfool, I stopped reading or contributing to the forums after the demise of the TMF hosting. It is good to see so many familiar names again, and in the case of Gengulphus, his lengthy explanation of the takeover process was extremely helpful.

It was trying to work out what to do with GKN brought me back, because I wanted to see what others thought.

HL only contacted me today, my inclination is to do nothing, which according to their communication means that I don't accept the offer.

Reebus

[Alaric]

HL only contacted me today, my inclination is to do nothing, which according to their communication means that I don't accept the offer.

That was interactive investor's default position as well.

[Bouleversee]

Gavin Williamson, the defence secretary, has now entered the fray and has raised "serious concerns" with Greg Clark, the business secretary over the bid, according to The Times. He is worried about the parts of the business which provide components for military equipment coming under foreign ownership in the event of a break-up. However, since GKN is also planning a break-up, that doesn't make a lot of sense at this stage.

[dspp]

There is a difference between breaking yourself up in a controlled fashion, and having a predator do it to you.

imho the UK is - if we end up in a hard Brexit world - going to be below critical mass as a first division defence manufacturer in any case, even if we are perhaps not already. But there is no need to make it worse.

regards, dspp