To very little fanfare, London’s stock market on Thursday gained a £1.6bn engineering company that supplies 90% of the world’s vehicle manufacturers and is top dog in the specialised field of drive systems.
The lack of buzz was perhaps understandable. The company’s name – Dowlais – may be new, but the business itself is merely a demerger from FTSE 100 firm Melrose Industries. Its main operation is GKN Automotive, one half of the GKN engineering empire that fell to Melrose in an acrimonious £8bn takeover battle in 2018.
Remember the heat, fury and headlines that were generated by the great Melrose-GKN showdown? The bidders were billed in some quarters as asset-stripping financial engineers who would enrich themselves by wrecking 259-year-old GKN. A committee of MPs grilled Melrose’s bosses about the future of UK engineering and national security implications.
On the other side, GKN’s directors turned somersaults to try to escape the bidder. They rewrote strategy on the hoof to propose a break-up and a merger of GKN Automotive with US company Dana. It didn’t work. Melrose won the shareholder vote narrowly, with the business secretary of the day extracting a few (modest) undertakings covering research and development and continued UK presence.
The Dowlais demerger, then, is a moment to ask whether the 2018 fuss and fears were justified. The answer is surely no. Melrose’s crew do indeed pay themselves megabucks when their deal-making delivers the financial goods, but they can’t really be accused of slash-and-burn tactics at GKN.
Ex-workers in ex-GKN plants that were closed in Erdington (automotive) and Kings Norton (aerospace) may understandably disagree, but life under an independent GKN might not have been markedly different. Old management, after years of underperformance, was already under intense pressure to get leaner; and if the Dana deal had happened, automotive control would have passed to the US.
As it happens, the on-the-ground UK presence in automotive was always small. But having a UK-listed and UK-headquartered Dowlais is surely a better outcome than the alternative in 2018. There is no guarantee that a liberated operation will retain its independence for ever, but drivetrains are needed equally in an electric world; Dowlais could be an acquirer.
The record also shows that group-wide post-takeover spending on research and development under Melrose continued much as before. In aerospace – the bit that excites the City – the number of sites globally has shrunk from 50 to 35, but investment (with government backing) has gone into a new technical centre at the Filton base near Bristol, which makes wing structures, including for the Airbus A350. The position of the pension fund, another concern in 2018, is vastly improved.
After a few more laps, Melrose will probably sell the aerospace business – its sole asset now – because that’s what its “buy, improve, sell” mantra dictates, and because the five-year undertaking to retain it has now expired. Again, though, one can’t imagine an alternative glittering history under old GKN; the City’s confidence in the company was low, and then the pandemic struck.
Indeed, a good question to ask is whether Melrose or old GKN was better equipped to navigate Covid’s hit. Liam Butterworth, chief executive of Dowlais, reckons his side of the operation “would definitely have run out of cash if it weren’t for our turnaround programme”. Hard to prove, but it sounds directionally correct. Melrose’s heavy focus on cash, costs and working capital came at the right time.
Melrose still has to show investors that the GKN deal, after Covid’s interruption, will deliver the traditional high financial returns. But neither extreme outcome that some imagined in 2018 – instant riches or instant catastrophe through overreach – has come to pass. Instead, it’s been a tale of hard grind and steady improvement. The 2018 fears were wildly overdone.
