youWith very little fanfare, the London stock market on Thursday gained a £1.6bn engineering company that supplies 90% of the world’s car manufacturers and is a leader in the specialist field of drive systems.
The lack of rumors was perhaps understandable. The company name, Dowlais, may be new, but the business itself is simply a spin-off of FTSE 100 company Melrose Industries. Its primary operation is GKN Automotive, half of the GKN engineering empire that fell to Melrose in a bitter £8bn takeover battle in 2018.
Remember the heat, fury and headlines that the big showdown between Melrose and GKN generated? The bidders were pegged in some quarters as financial engineers who would divest themselves of assets and get rich destroying 259-year-old GKN. A committee of MPs questioned Melrose bosses about the future of UK engineering and the implications for national security.
On the other hand, the GKN executives did somersaults to try to escape the bidder. They rewrote the strategy on the fly to propose a breakup and merger of GKN Automotive with the American company Dana. It didn’t work. Melrose won the shareholder vote by a narrow margin, with the day’s business secretary extracting some (modest) commitments covering research and development and a continued presence in the UK.
The Dowlais spinoff, then, is a time to wonder if the hoopla and fears of 2018 were justified. The answer is surely no. In fact, the Melrose team pays themselves a lot of money when their deals generate financial assets, but they can’t really be accused of slash-and-burn tactics at GKN.
Ex-workers at the closed GKN plants in Erdington (automotive) and Kings Norton (aeronautics) understandably disagree, but life under an independent GKN might not have been much different. The old management, after years of underperformance, was already under intense pressure to be more efficient; and if the Dana deal had happened, automotive control would have passed to the US.
As it happens, the UK’s on-the-ground presence in the auto industry was always small. But having a UK-listed, UK-based Dowlais is certainly a better result than the alternative in 2018. There’s no guarantee that a derelict operation will retain its independence forever, but the powertrains are just as necessary. in an electric world; Dowlais could be an acquirer.
The record also shows that group-wide post-acquisition spending on research and development under Melrose continued as before. In aerospace, which excites the city, the number of sites worldwide has dropped from 50 to 35, but investment (with government backing) has gone into a new technical center 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, has improved enormously.
After a few more rounds, Melrose will likely sell the aerospace business, its only asset now, because that’s what its “buy, upgrade, sell” mantra dictates, and because the five-year commitment to retain it has already expired. Again, though, one can’t imagine an alternate glittering story under the old GKN; the city’s confidence in the company was low, and then the pandemic hit.
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In fact, a good question is whether Melrose or the old GKN were better equipped to navigate the Covid hit. Liam Butterworth, chief executive of Dowlais, says his part of the deal “definitely would have been out of cash if it weren’t for our restructuring programme.” Difficult to test, but sounds directionally correct. Melrose’s strong focus on cash, costs and working capital came at the right time.
Melrose has yet to show investors that the GKN deal, after the Covid disruption, will deliver the traditional high financial returns. But none of the extreme results that some envisioned in 2018—instant riches or instant catastrophes from overreach—has come to pass. Instead, it’s been a story of hard work and constant improvement. The fears of 2018 were exaggerated.