FTSE 100 engineer GKN hit back at hostile bidder Melrose on Monday, warning that the debt plan put forward by the turnaround specialist would put pressure on its pension scheme.
Melrose is said to have stated that it will raise GKN’s leverage to 2.5 times its core earnings, materially higher than the 0.6 times leverage level presented by the company in June 2017.
The British engineering group says Melrose reducing the strength of its covenants, viewed as critical to its investment strategy, will increase the need for cash to fund its pension scheme.
GKN is making parts for the US’s F-35 strike fighter as well as its new G-21 stealth bomber
GKN said its pension fund covenant was assessed at the ‘high end of good’ during its last triennial valuation.
Pension trustees can demand more money is put into a company fund if they believe that the risk posed to future funding has increased.
A GKN spokesperson said: ‘This may have implications for the covenant strength of the company, the level of the technical provisions deficit and therefore the level of immediate and long term cash funding requirements.’
This is the latest twist in what has been a tumultuous takeover bid, which has seen Melrose try take advantage of investor dissatisfaction over GKN’s low margins.
Its approach and £7.4billion bid has been resisted by GKN board, which told Melrose that plans would have to be drawn up on how to fix GKN’s £1billion pension deficit before any proposals would be accepted.
City analysts told The Mail on Sunday that they expect Melrose to raise its bid and win over the FTSE 100 firm.
New GKN boss Anne Stevens.
GKN’s work in the defence and aerospace sector has recently put the takeover under parliamentary scrutiny, with ministers citing national security reasons for a potential investigation into the bid, according to press reports.
GKN has proposed splitting up its aerospace and automotive arms as an alternative corporate strategy to a takeover.
A spokesman for Melrose responded: ‘This is presumably a clarification on the back of reported analyst briefings on the subject by GKN last week.
‘At the time of the trustee statement we said: ‘The numbers published by the GKN trustees are entirely in line with our own reading of the pension exposure at GKN. Melrose has an impeccable track record of safeguarding and improving pensioners rights in every acquisition we have made’.
‘Today’s statement from GKN has no impact on our calculations and contains nothing that should concern GKN pensioners.’