On 27^th April 2018, Melrose announced that its offer to acquire GKN had been accepted by shareholders representing more than 90% of the value and voting rights of GKN shares, so it was proceeding to squeeze out the final 10% in order to complete its takeover of GNK. This announcement marked the end of a rather bad tempered war of words between the companies in which competing plans for GKN’s underfunded defined benefits pension schemes was a major focus of attention.

In what would normally be highly confidential discussions, offers and counter-offers between Melrose, GKN and the pension scheme trustees were widely reported, with the trustees appearing to play one party off against the other to secure a bumper pay-out from Melrose for the schemes to smooth the path to the takeover.

So what did the trustees do and is their influence on this deal indicative of a change of approach in M&A activity to put trustees at the centre of the negotiation?

The fight started on 8^th January 2018 when Melrose Industries PLC, threw its hat into the ring and made an offer to acquire the entire issued share capital of GKN plc. GKN came out fighting and swiftly rejected this offer as both opportunistic and fundamentally undervaluing its business. Blows were exchanged over the next few weeks and GKN announced plans to sell its automotive business (and transfer a significant chunk of its pensions liabilities) to Dana Inc in a bid to repel the takeover. Around this time, the impact on GKN’s extremely large pension schemes both of this proposed sale and the potential takeover started also to hit the headlines.

This ended up catching the attention of Frank Field MP, Chair of the Work and Pensions Committee, who wrote to the Chief Executive of the Pensions Regulator on 22^nd February to enquire what engagement the Regulator had had with GKN and the trustees, given the estimated £2.2 billion solvency deficit in the schemes (ie measured as it the schemes wound up). Its response explained that the Regulator has met, separately with trustees, GKN and Melrose stressing the need to identify if the takeover would detrimentally impact the pension schemes and, if so, for appropriate mitigation to be put in place. The Pensions Regulator cannot (without a change in the law, is being proposed) veto a deal or impose commercial terms on the parties, but it did “strongly encourage” Melrose to submit a clearance application which, if done, would have given the Regulator a formal seat at the table in the commercial negotiations to ensure that the takeover would not damage the pension schemes’ ability to meet their liabilities. But no clearance application was made. The meant that the trustees shouldered the burden of protecting the interests of the pen schemes’ members, whilst also having no power to veto the deal- and it turns out, they did this rather well, with the very high profile nature of the take over appearing to work to the members’ advantage.

Melrose’s initial offer included a voluntary cash contribution of £150 million into the pension schemes and assurances of its track record of improving the funding level of the defined benefits schemes within its portfolio of investments. After discussions with Melrose, the trustees then appeared to side with GKN in the Dana sale, being attracted to the promise of GKN making sufficient cash contributions to the group’s schemes to make them fully funded on an IAS 19 accounting basis. But that sale did not proceed and Melrose then improved its offer to the trustees by promising both £150m cash and to beat the contributions currently being paid by GKN into the schemes. Negotiations continued privately but getting the public support of the trustees was key to winning the hearts and minds of the GKN shareholders and ensuring that the powers of the Pensions Regulator were not unleashed on Melrose, which could have delivered a knockout blow for the takeover.

On 21^st March, Melrose announced that it has reached an agreement with the trustees to put up to £1 billion in the GKN schemes over its period of ownership, secured by a company guarantee as “another important step in our offer to buy GKN”. The chair of the trustees celebrated this as “a positive outcome for our members”. Indeed, it was and a week later the bid was accepted. And significantly, Melrose engaged with the with the Regulator and updated them on the agreement with the trustees in a meeting on 26^th March. This shows that is a commercial flight is sufficiently public, and if this result in sufficient mitigation being provided, scheme members’ interests can be protected and the Pensions Regulator will not use its powers even if clearance is not obtained.

Anne-Marie Winton, Partner
This article was published in Acquisitions Daily