Why the acquisition of GKN added value to the transformed Melrose | Analysis

When one company is acquired by another, a period of rapid integration usually begins as systems, people and probably the way the company does business are adopted by the new owner, often leaving little more than a name. However, sometimes the opposite is true and the acquiring company is transformed by the process itself.

This is the case with Melrose Industries, which fundamentally overturned its strategy after acquiring GKN plc in 2018.

As a “listed private equity fund,” Melrose’s approach was to track down high-quality but underperforming companies, take control, restructure them and then monetize them – “buy, improve, sell” was the motto of what Peter Dilnot, chairman of GKN Aerospace, calls the “buccaneer business.”

That meant that GKN – itself made up of four separate businesses, including aerospace – was included in a basket of other independent companies under Melrose’s ownership at the time of the takeover. “But that business model is now coming to an end,” says Dilnot.

Just five years ago, Melrose had about ten different operating companies, but after a series of divestments, GKN was the only company in the portfolio until 2023. Nevertheless, the company felt it had to move on.

“It became very clear to us that the company was not performing as it should in terms of the capital markets and its valuation – the sum of its parts was not right,” he says.

With limited interest from asset managers in investing in a de facto conglomerate – even one as small as GKN – the decision was made to spin off the remaining automotive, powder metallurgy and hydrogen businesses and create what Dilnot describes as a “long-term pure-play aerospace company”. This process was completed last year.

In effect, two brands now exist within the same company: GKN and Melrose Industries exist in parallel: Dilnot is actually CEO of the latter, having replaced former GKN Aerospace boss David Paja in March 2024. With the new business model comes a new slogan: “Design, Deliver, Improve”.

Dilnot says that to attract the attention of capital markets, it was necessary to “put GKN Aerospace’s quality into perspective” and “describe the engine business, the structural business and the content per aircraft”, alongside financial metrics such as cash generation and sales margin.

The result? “We are now a FTSE 50 company with a total enterprise value of £10 billion ($12.6 billion),” he says. Last year’s results were also positive: revenue was £3.3 billion, up from £2.9 billion in 2022, while profit before tax was £331 million, up from £62 million the previous year.

GKN aims to generate EBITDA of £900 million by 2025, building on a forecast of £710-730 million this year. “This is a huge step from where we started,” says Dilnot.

STRATEGIC REDESIGN

Thanks to the strategic realignment, aerospace is now “at the heart of everything we do,” he says. At the core are two business areas that operate in both civil and military sectors: aerostructures – which includes high-voltage power distribution systems and transparencies – and engines, which includes GKN’s emerging hydrogen and electric propulsion interests.

GKN is a “rare combination,” says Dilnot, because it is a “super-tier-one” supplier where “we think like an equal and act like an OEM,” in two areas that are rarely covered by the same company elsewhere.

“Everything we do is to improve our position in design… we are not interested in build-to-print work,” he says. “Our best positions are those where we create the most value for our customers” – whether through partnerships with engine manufacturers that share risk and reward or “deep technology positions, for example in wings with Airbus.”

But the strategy also means that “we don’t want to get involved everywhere.” This change is already having an impact: GKN has withdrawn from certain contracts in the defense market “that are unfavorable or burdensome.”

This also had an impact on the company’s presence: from around 50 sites at the start of the Covid-19 pandemic in 2020, there are plans to have 31 by the end of 2025. Some sites have been divested – in April the company completed the sale of a structural plant in St. Louis, Missouri, to Boeing – while others have been closed or merged into “centers of excellence.”

GKN has also built a network of four Global Technology Centres, the most recent of which is a facility in Dallas Fort Worth, Texas, that specializes in Additive Layer Manufacturing (ALM) – or 3D printing.

“What we have now is a dynamic company with people focused on the right technologies in the right places,” says Dilnot.

Europe – particularly the Netherlands, Sweden and the UK – and North America remain GKN’s main focus, with “growing presences” in India, Mexico and China. GKN now has three sites in China and partially supports production at domestic aircraft manufacturer Comac.

While part of GKN’s growth is due to a buoyant market, the company’s heavy investment in research and development also plays a role, argues Chief Technology Officer Russ Dunn. Spending is focused on four broad areas: additive manufacturing, composite technologies, electric flight and clean air partnerships.

Technologies that support hydrogen propulsion are an example of “anticipating the future needs of the market and being prepared for what awaits us in the near future,” he says. Research is being carried out into what will be required, although there is “no launch pad” for such a propulsion system. “But we know that if we wait until they are ready to launch, we have already missed the boat,” he says.

TRANSFORMATIVE TECHNOLOGY

ALM is an area that GKN is particularly pushing forward as the company sees it as a transformative technology that promises less waste, lower energy consumption, better component design and shorter supply chains.

This time last year, GKN was preparing to begin volume production of a new large 3D printed part – a fan case mounting ring for the Pratt & Whitney PW1500G engine. That operation is now underway and, according to Dunn, GKN is eyeing other applications for the technology.

The expansion of the company’s ALM capabilities is supported by a £50 million investment in its facility in Trollhättan, Sweden – including a £12 million contribution from the country’s government. This is the result of the bolt-on acquisition of Gothenburg, Sweden-based additive manufacturing partner Permanova Lasersystem in October 2020.

Melrose has so far ruled out further major acquisitions, but could the quality of the assets coming onto the market – such as Rolls-Royce Electrical or parts of Spirit AeroSystems – tempt the company to tighten its belt?

“We shouldn’t rule out mergers and acquisitions completely,” says Dilnot. “I wouldn’t say we’ll do anything significant in the next few years, but beyond that, if it makes sense, we’re open to it. But our bar is pretty high for what we would consider.”