GKN: Proposed Takeover by Melrose

Rachel Maclean Excerpts

Thursday 15th March 2018 Westminster Hall

[Mr Bailey]

My hon. Friend anticipates some of the points in my speech. I agree with him completely.

GKN holds the position as one of the world’s greatest tier 1 providers in part because of the number of portfolios it holds worldwide with other joint venture companies, as well as with British companies, but also because of its research, development and technological advances, particularly in the automotive and aerospace industries. The UK aerospace sector is the largest in Europe, second globally to the USA. It supports more than 210,000 well-paid jobs in this country and delivers £29 billion in exports, generating £32 billion in turnover each year. GKN, as the only large tier 1 supplier, has a strategic role in the growth of the sector and, as I said earlier, it makes a total contribution to the UK economy of more than £1.3 billion.

GKN’s identity as a sector leader is largely based on the large amount it invests into research, development and technological advances. The distinctive focus on research has for decades been the cornerstone of the company. By its very nature, research and development involves long-term investment projects. The benefits of such programmes are often enjoyed only decades or even longer after the investment has started.

Typically, the motor industry has a product cycle of seven to 10 years, but at the moment major car manufacturers are looking for long-term partners to invest in future generations of electric vehicles. Because of its long-standing association with those companies, GKN is currently well placed to be a partner in such ventures. The aerospace sector has a product cycle of 20 to 40 years, again highlighting the importance of a company investing long term with the companies it serves. Since 2000 GKN has invested more than £561 million. That has created long-term, well-paid, highly skilled jobs that are of particular benefit to our regional as well as our national economies.

[Rachel Maclean (Redditch) (Con)]

I agree with the speech the hon. Gentleman is making and his excellent points. Will he touch on the issue of the productivity gap between the south-east and the midlands? We are midlands MPs, so is he concerned about that in relation to the takeover?

[Mr Bailey]

Absolutely. The hon. Lady puts her finger on a very important point. Productivity in the motor and aerospace industries is way ahead in manufacturing overall, and in other types of business as well. Anything that damages such industries will damage the level of productivity in our economy, which we all know is a matter of considerable concern.

GKN not only invests in research and development in its own companies, but partners universities up and down the country—Leeds, Manchester, Warwick, Nottingham and Sheffield, for instance—again helping to underpin regional economies, driving research excellence and giving students the level of skills that they need and an involvement in manufacturing that is absolutely crucial for developing our future skills base. As the hon. Member for Isle of Wight (Mr Seely) mentioned, the Melrose business model appears to be fundamentally incompatible with that approach.

I was chided by the Melrose chief executive for calling Melrose a hedge fund company. It says it is not; it says it is a turnaround company. In the Business, Innovation and Skills Committee it was called an asset-stripping company. Whatever we call it, it has a short-term strategy reminiscent of the way in which hedge funds work. It aims to buy and sell companies within a window of between three and five years. Despite protestations that it does keep companies for the longer term, one example that must be considered is that of Brush of Loughborough, a UK company that makes gas turbines. It was taken over by Melrose 10 years ago and is failing. Melrose has been unable to sell it on in its desired turnaround window because of the huge structural change in the sector owing to the move away from fossil fuels. Melrose has failed to invest in development to mitigate the changes and save employment within the company. It has already halved its workforce and has recently announced another 270 job cuts.

Although Melrose has invested £230 million in research and development in various companies over the past five years, the significant thing is that that is less than it paid its top 20 executives in the past year alone. That does not seem to be indicative of a company that is committed and wedded to long-term investment in research and development.

Many Members will have seen the announcement from Tom Williams of Airbus. The Financial Times has today published an interview with Tom Williams, the chief executive of Airbus, which is one of GKN’s biggest customers. He said it would be “practically impossible” to give new work to the engineering group if Melrose succeeded in its hostile bid. He cited the lack of “strategic vision” and the lack of long-term investment owing to the short-term ownership model. We could not detect a more telling intervention and substantiation of the point being made. We must remember that Airbus is only one customer of GKN, but Airbus’s public statement sends a signal to many other strategic customers of GKN.

Another cause for concern is the relative size of the companies. Last year alone GKN had revenue in excess of £10 billion, compared with just over £1 billion at Melrose, which proposes to finance its bid by borrowing £3.5 billion.

In addition, GKN employs 60,000 people across 30 countries, a level of personnel management that Melrose has no comparable experience of. As part of its takeover bid, Melrose has revealed plans to sack the entire board of GKN. Melrose as a company would double in size, but with no commitments to further capacity and an absence of the management expertise that has historically been part of GKN. Furthermore, Melrose has never taken over a company that specialises in aerospace manufacturing, which is perhaps one of the most concerning issues of all.

GKN’s prominence in the aerospace sector means it has a unique stake in the maintenance of our national security. As a leading world tier 1 supplier, it operates on a lot of UK defence platforms. As its order book with the Ministry of Defence is relatively small, Melrose has claimed that that issue is not significant. It ignores the fact that many of GKN’s customers are foreign companies that provide defence equipment that is subsequently procured by this country, so there is a much greater strategic involvement than the figures quoted by Melrose suggest.

GKN’s military aerospace involvement includes Lockheed Martin, Lightning, Raptor, Boeing, Eagle, Hornet, Harrier II, Eurofighter, Typhoon, Panavia, Tornado, Saab, Gripen and the new B-21 engine—a huge range of engines and vital components in a vast range of our defence components and needs for the future. Significantly, our own Defence Secretary felt the need to raise this issue with the Department as he no doubt responds to concerns that lie within the industry. I hope the Minister will refer to that when he sums up.

The US Government are highly likely to review any takeover via their Committee on Foreign Investment. The UK has a clear interest and should do the same. The public interest test applies under the national security element of section 58 of the Enterprise Act 2002, and the UK Government have the power to consider whether the takeover is in the public interest.

--- Later in debate ---

[Rachel Maclean (Redditch) (Con)]

It is a pleasure to speak under your chairmanship, Mr Stringer. I will of course stick to the timing, but if I stray over, please do not hesitate to call me to order. It is a great pleasure to follow the hon. Member for West Bromwich West (Mr Bailey). I heartily congratulate him on securing this extremely important debate. I agree with virtually everything he said, and it is a pleasure to have that experience about a speech made from across the Chamber. I see other midlands MPs in their places; we have many common interests in this important matter.

GKN has a 250-year history and has played a significant part in the manufacturing heritage of the midlands for many years, since it was established as an ironworks in 1759. In Redditch we are proud to host the global headquarters of that multinational business. As the local MP, I have engaged with it through visits and through discussions of how it will continue to work proactively in the local community, of which it is a great supporter. That is a responsible approach and GKN is leading by example.

Unfortunately, when GKN announced its results in 2017, although the latest annual sales figures were up, its trading margins had started to fall. It was evidently vulnerable and it set out to launch a new strategy to boost the company. Once it became clear to me that GKN was under threat of a hostile takeover, I spoke without delay to the company bosses and was told in no uncertain terms that all 260 employees in Redditch, many of whom are my constituents, would lose their jobs if Melrose were to be successful in its takeover. It is for those 260 people that I speak today. As the hon. Member for West Bromwich West has said, they are among a small number around the world. I welcome the Government’s recent move to strengthen the takeover rules, following the report from the Takeover Panel. It is welcome, and is in line with the Prime Minister’s manifesto commitments. I ask the Minister to update us on the consultations and proposals. My constituents and GKN employees would welcome further clarity.

The hon. Member for West Bromwich West, who spoke so well, covered most of the points that I wanted to make, and I shall confine my remarks to a few key areas. I agree that the takeover appears to be opportunistic, and there is great concern that the offer would undervalue GKN’s business culture, which it fought hard to build up for many years. GKN has invested heavily in research and development expenditure, skills and engineering jobs, all of which are badly needed in the UK, particularly in the midlands. Its work and portfolio have been built up with years of experience, which are not matched in Melrose. We in the midlands are proud of our record—our heritage—of making things.

GKN may have lost its way, up to a point, in recent years. Perhaps it is not performing to the full extent of its capability, but it has a focus on a long-term business model. That is a welcome contrast to the short-termism of Melrose, which is not seen as a sustainable long-term investor in the best interest of the company. Indeed, GKN’s former CEO, Nigel Stein, resisted splitting up the firm because he felt that the expanding aerospace business provided a degree of security against the typically cyclical nature of its auto side. It made sense to grow, given the increasing overlap of aerospace and automotive, and the fact that a bigger business is better able to resist takeovers—witness what happened to Cadbury after it separated from Schweppes.

I have written to the Secretary of State and have met him to put those concerns to him. I fully understand that, as he has explained to me, he is unable to comment directly on the matter, owing to the quasi-judicial nature of his role. I understand that any comments that he made could be construed as affecting the course of the takeover and could undermine and invalidate it. However, I am calling on the Minister who is responding to this debate to provide any further clarity he can. The Business, Energy and Industrial Strategy Committee, led by its excellent Chair, the hon. Member for Leeds West (Rachel Reeves), is looking at the matter and would, I am sure, welcome clarity. I see that a fellow Committee member, the hon. Member for Inverness, Nairn, Badenoch and Strathspey (Drew Hendry), is present for the debate. It was interesting today when GKN’s biggest customer announced its view. I believe it is quite rare for not only a customer, but the board of pension trustees and the entire board of directors to reject a bid in that way.

I want to touch on one matter that I believe is in the takeover code, which is that a company that is going to take over a company must provide assurances as to what it will do. Melrose has tried to provide assurances to our Select Committee and in the public arena, and it has sent letters to me—I do not know whether the other members have received them. It has pledged to keep GKN’s headquarters in the UK and maintain the same levels of research and development funding, but we do not know what those pledges are based on and what is behind them. How can we be certain that they will be adhered to and delivered? That is a matter of great concern to GKN and people in Redditch. Since GKN’s sale of its Driveline business to Dana, there has been a lot of turbulence inside the company. A number of issues are affecting GKN employees in Redditch and are causing them to worry.

In Melrose’s defence, it has said that it is a people-focused company with an outstanding track record on pension schemes, and it has indicated that GKN’s current schemes will be safe. It has said that it invests more in R&D than GKN does, and that its actions are in line with the Government’s industrial strategy. It has said all those things—I am putting them on the record to be fair to it—but I want to see more evidence of that because the weight of evidence is not currently in its favour. We must find a balance between a short-term cash injection and a long-term strategic overhaul, and it must be managed by those with knowledge of and expertise in this industry.

I believe, as the hon. Member for West Bromwich West said, that the Government are responsible for supporting the growth and productivity of this sector and for creating the right business environment. That would have so many benefits for our economy in the midlands, for our productivity and for the whole skills piece. We are encouraging young people in our communities to set out a path for themselves in the fantastic science, technology, engineering and maths subjects. We have skills gaps in those sectors in our country, including in the midlands. GKN is a great example of a company that has brought on young people and promoted such careers, but I fear for the future of that.

The evidence in front of me does not convince me that this takeover bid is in the best interests of the company, the country’s long-term industrial strategy and the shareholders. There are important questions to be answered about how we define our national interest and defence.