Oral evidence: The Future of GKN, HC 844

Oral evidence, 6 March 2018.

Witnesses

Anne Stevens and Jos Sclater.

Chair

Thank you very much for coming to give evidence in our session today. We will be hearing this morning from GKN, Melrose and then Unite the Union on the proposed takeover bid by Melrose for GKN and GKN’s response to that. We have a lot of questions to get through, so we are going to start straightaway.

Mark Pawsey

Good morning. I wonder if you could start by telling us about the performance of the company in the past two or three years and, in particular, the need to issue a profit warning in October of last year.

Anne Stevens

Thank you for the question. First off, thank you for giving us the opportunity to speak with you today and to answer your questions. GKN has been a successful company for many years, with a 250‑year history. We are committed to long‑term investments in technologies for both the aerospace and auto markets. Many of those technologies have been researched and developed in the UK. To answer your question specifically, we are a company that has outperformed over many years. I will just give you one statistic: in the past five years, we have outperformed the FTSE 100 Index by 33%. Yes, we encountered problems with large manufacturing companies. Some of the problems we encountered were in launches and transitions from major commercial and military programmes. To the question you asked, some of the problems that we encountered were in US aerospace. Some of it was because in our contracts we have cost‑cutting commitments that we make to the customer. We cut a bit deep. We destabilised the plant a bit and we were producing some product that was not able to be shipped. The product was held in inventory. I could say that we were a bit over‑optimistic in evaluating the ability for us to rework the inventory and ship to the customer. That problem has been corrected, but overall, even with those issues in 2017, we hit a record sales level of over £10 billion for the first time in GKN’s history.

Jos Sclater

There was also record profit. You specifically referred to the October trading update. That was also partly because we had a 30 million claim, but that was nothing to do with any product we made. We own a share of the engine programmes of the OEMs. One of those programmes had some launch issues, and that flows through to some of our contracts.

Mark Pawsey

How old is the origin of the problems you have told us about? Does that go back 10 years or five years? What was the management team at that time? Was it aware that this was likely to happen?

Anne Stevens

Are you specifically asking about the problems we spoke of in aerospace?

Mark Pawsey

If that is the only area where is there is a problem, yes. Are you saying the remainder of the business was perfectly satisfactory and there were simply problems in aerospace? Were there issues in other parts of the business as well?

Anne Stevens

It was aerospace that I spoke of, and that occurred over the past two years. Some of the product that was produced was defective. It was not all, just some. That has been corrected with teams in place.

Mark Pawsey

Is the management team that was responsible for those problems still in the business?

Anne Stevens

In aerospace, we had a person who was in charge of that operation who is no longer with the company. But let me just address the second thing. In the automotive side of the business we experienced some launch issues with one of our clients. That is a normal process, as you are developing and launching new product. Again, that problem was experienced and the problems have been corrected.

Mark Pawsey

Why is there a bid? Why is there a company looking to acquire GKN?

Anne Stevens

As to why there is a bid, you would have to ask the other company.

Mark Pawsey

But you must have a view. You must know about the state of your organisation and why that has given rise to what has happened.

Anne Stevens

I can talk about our organisation. We have a strategy. Back in 2017, we did a very deep dive at the request of the board of directors to look at the strategy and our plan. We have revised our strategy, which has focused on continuing investment in the world‑leading technologies we have in eDrive, composite aerostructures and different types of energy platforms like a new flywheel that adds efficiency. We have delivered profits over the years at record levels, and we have a revised strategy and a new team to both execute the improvement plans of Project Boost and continue our strategy to develop world‑leading products.

Mark Pawsey

Would you be doing the things you are doing in the absence of this bid? Would you be doing them anyway or has this focused your attention? Have you started to attack areas of the business because there is somebody looking over your shoulder?

Anne Stevens

That is a very good question. The board was looking at the financial performance. There is always an opportunity to improve financial performance, and the work was started in 2017. We saw opportunities to improve cost performance in two particular areas. The first is indirect procurement—for example, things like gloves, glasses and loo paper. The second thing is this. We have been a world leader in implementation of Industry 4.0. That is about adding automation and other state-of-the-art technology into our manufacturing plants. Early in 2017, we did a study across seven of our plants to accelerate the Industry 4.0 initiative. That started well in advance of the unsolicited offer we got from Melrose.

Mark Pawsey

The criticism of your performance is that you have focused too much on increasing sales at the expense of profit margins. How do you respond to that?

Anne Stevens

There was a strategy to increase sales. We have more stakeholders. Obviously, we have a responsibility to our shareholders, but we have other stakeholders like our employees, pensioners, customers and communities. Part of the sales growth was so that we would have very strong balance sheets to take care of all stakeholders, not just our shareholders.

Mark Pawsey

In terms of profitability, your aerospace margins have never gone above 8%, but you are looking to achieve 11% now. What have you done to the business that will make that achievable?

Anne Stevens

I spoke about our new strategy. When we were looking at objectives in the past, we were averaging and aggregating the businesses within driveline and aerospace. It was difficult to identify exactly where the problems were. We have a world‑leading aero engine business. At the same time, we have some very high‑tech aerostructures business, but we also had some low‑performing structures businesses in North America. What is different in this strategy is that we have taken aerospace and broken it down into the different product segments, so that we have the appropriate targets in the different segments.

Jos Sclater

Just to be clear, our aerospace business has made more than 8% margin for most of its history, and large parts of it still do. Our aero engines business is a phenomenal and very long‑term business; it has a 40‑year investment horizon. That makes over 13% margin as it is today. Most of our structures businesses are already making north of 10%.

Mark Pawsey

Is it your strategy to retain all the businesses? Do you have any plans for divesting any parts of the business?

Anne Stevens

We did a deep study of all the different products in the businesses by core and non‑core. We broke the core sector into businesses where we need to improve the cash and profitability, businesses we want to grow and business like eDrive that we want to develop. Of our businesses, 25% are non‑core. There is a programme to find better owners for those businesses.

Jos Sclater

Could I make one extra point on your growth point? I do not want people to think that growth is a bad thing. Growth is fantastically important. Growing an engineering company by £500 million in sales last year—roughly speaking, that is three extra factories—is a fantastic achievement. I know we have had some growing pains, but we have revenue of £10.5 billion. Now we need to drive the margins up and get more profit out of it. But the hard thing to do is to grow a business that fast, and that is a real achievement.

Peter Kyle

Anne Stevens, you mentioned that there have been changes in your management team. Can you talk us through the changes and what drove those changes?

Anne Stevens

Do you mean the changes I have made to the management team?

Peter Kyle

Indeed, yes.

Anne Stevens

Since I have been in there, I have made some changes. When we identified that we had the issues in aerospace, my predecessor left the company and I took over. Within the aerospace business, we appointed a new head of aerospace. His name is Hans Bruckner. Hans was CEO of Fokker, and he did a fabulous job in that business. The other thing we did identify, which I have referred to in the past, is the North American structures business. We removed that person from the job, because we had issues that were not taken care of. We replaced him with the previous leader of the aero engines business.

Peter Kyle

There were performance problems in that post.

Anne Stevens

Yes, when we had the build‑up of the product that we ultimately had to write off. That person has been replaced as well. I have added infrastructure to help the teams to allocate resources on improvement programmes for things like Industry 4.0.

Peter Kyle

What does “infrastructure” mean in that context? You said that infrastructure has been put in to support teams.

Anne Stevens

Teams have projects. Sometimes, within their own facilities, they have enough resource engineers to support the programmes they have. If we want to have a programme to accelerate automation in a plant, the engineers we currently have in the plant are insufficient to do their day job plus accelerating the manufacturing excellence. In a case like that, we would bring in incremental engineers and allocate them to the plant. It is about bringing in people who have access to capability and talent to help the teams achieve their objectives.

Peter Kyle

At board level there have been some changes too. Last month, a non‑executive director resigned or stood down. Why was that?

Anne Stevens

Let me just say what happened. Richard Parry‑Jones had been both the senior independent director and the head of the remco. He has been the independent director for six years. Good governance is to rotate leaders so you can get fresh perspectives and views. Angus, who has been on the board and who is a sitting CFO, has assumed the role of SID. Richard continues to chair the remco. Both of them are still on the board.

Peter Kyle

Are you saying that the changes in the board have been evolutionary and not impacted at all by any of the other restructures, changes or responses to market conditions that you are talking about?

Anne Stevens

Yes, rotating positions of chair and SID is something most boards do every few years.

Peter Kyle

I understand, but my point is that you have been compelled to restructure parts of your business but not the board. Why is that?

Anne Stevens

In terms of governance, we have a new senior independent director. He has just assumed the role in the last couple of weeks, and I am sure that is something that is on his agenda to look at.

Peter Kyle

Am I misinterpreting you? You are saying the board is evolving as it does in any other period of time. You are restructuring your business in response to the market conditions and adjusting to the fact that you need to drive more profitability. Surely the fact the business has evolved in this way and did not do this at the right time was also linked to board performance. You are saying that the board performance is just carrying on as normal.

Anne Stevens

I am not saying that. I am saying that we did make some changes. I would expect that in the future there will be additional changes, as Angus really looks at skills and competencies. There is also a vacant position on the board. In 2016, I was brought in. I have since taken the executive role. I am sure the board will be looking at the skills and capabilities we have and how to build an even stronger board in the future.

Peter Kyle

The share price jumped upon the announcement from Melrose. Why was that? Is that not the market delivering a verdict on your performance as a management?

Anne Stevens

I will make one comment and then, if I may, I will invite Jos to comment. We had undertaken a review of both our strategy and our plans to improve the profitability of some of the product sectors back in 2017. We had planned to make that announcement at a results presentation on 27 February. Receiving the unsolicited bid pulled forward the announcement of a strategy that had been developed before we ever got the bid: the announcement of Project Boost, which was in strong stages of development before we ever got the bid. The replacement of some of the key members of the team had been done or was planned before we ever got the bid. Having the bid come in accelerated the announcement by a few weeks, but this was already in the plan. We believe, with the announcements we would have made, the share price would have increased as well.

Jos Sclater

The share price is bound to jump because they were offering more money than the share price before it was disturbed. The more important thing is that our new strategy and revealing the quality of things like our engine portfolio, where we have £13 billion of cash flow ahead of us through the investments we have already made, have already put a floor on the share price probably above the Melrose bid. As you see at the moment, our share price is diverging from the Melrose share price. That is probably the market saying that it does not think Melrose will win at this price.

Stephen Kerr

Melrose has accused you of copying its plans. What are the similarities?

Anne Stevens

I can give you documentation—I do not have it with me, but if you would like to see it I am happy to share it with you—that shows our Project Boost was in process well before the bid ever came in. In terms of our strategy, Jos and I met on 6 January[1]. We have a picture of the whiteboard that has our product‑segment strategy with the categories on 6 January[2]. This is well before they ever came in.

Stephen Kerr

What are the similarities between that plan and Melrose’s plan?

Anne Stevens

Mr Kerr, I am sorry. I have not seen the Melrose plan. From what I know of Melrose, I can say it is a buy/sell short‑term business model. We have a very long‑term business model where we invest in technologies for the long term. I am an engineer. I have worked in auto. I have been on the board of Lockheed Martin. I have run tier 1 companies. I know what it takes in this business to deliver, and I know, for an OEM customer, a short‑term programme is seven years, 10 years or more.

Stephen Kerr

Melrose is talking about five.

Anne Stevens

It is five at most—three to five. They buy and sell. We are a long‑term business. We are a technical company. It takes technology and long‑term relationships with universities, customers and communities to run this business. I do not see how a short‑term business model works, but I do not know what their plan is.

Stephen Kerr

Is this how you would categorise the main difference in approach, then, in terms of timescale?

Jos Sclater

Yes, it is short‑term capitalism versus long‑term capitalism. To give you a couple of good examples, take the A350 wing spar in Western Approach, which is a brand new factory we have built. We spent £160 million just on research and development for the carbon fibre wing spar there. We spent £250 million overall on that factory. We will be making carbon fibre wing spars for the A350 for hopefully the next 20 years or more. Similarly, take the Rolls‑Royce Trent engine. We spent £125 million on development and capitalising in order to help launch the Rolls‑Royce Trent engine. That will have maybe a 30 or 40‑year payback as those engines hang on the wings. Those types of investments are completely incompatible with a five‑year timescale. You are investing for your grandchildren. That is what we have been doing; that is what we want to carry on doing.

Stephen Kerr

Melrose has said that it is planning to improve both main parts of the business.

Jos Sclater

Yes, I notice it is not “grow” but “improve”. They are going to try to drive the margin up, which incidentally we will do. But this is also about growth and long‑term investment. Not everything is about driving the margin up. It needs to be a balance between growth—

Stephen Kerr

They were talking about improving and then splitting them. You are going to split them now. Is that right?

Anne Stevens

Here is what we have done. Part of the growth plan, which you have asked us some questions about already, is to have two very strong investment‑grade companies: an aero company and a driveline company. Part of the growth strategy is to grow those companies. In terms of investors, we get a discount in the market because we are a conglomerate. Many investors today prefer to pick what they want to invest in, auto or aero. The plan was to grow and to ultimately demerge into two very strong UK‑listed companies.

Stephen Kerr

Where are you now planning to split these businesses?

Anne Stevens

We had announced that the second quarter of 2019 is when we will demerge the businesses.

Stephen Kerr

You are also planning to sell the powder metallurgy business. That is in the next 12 to 18 months. Is that right?

Anne Stevens

Yes.

Stephen Kerr

Why is this not a core business?

Anne Stevens

Let me explain it to you. I was CEO of Carpenter, so I do know the powder metallurgy business. When I came in, I had some assumptions. “Okay, we make some gear parts or engine parts and supply internally to aero or driveline”. I assumed that was a synergy that was in the company. The synergy is not there. The second thing Jos and I did was to look at what our core competencies were in both aero and driveline. With powder metallurgy, there was no sharing of competencies there. Thirdly, we were looking at driving cost improvement and technology acceleration like Industry 4.0, and powder metallurgy is a world leader in those types of programmes. When we looked at improvements in profitability, we had already created so much value there.

Stephen Kerr

Melrose talks about improving the value of this particular business before moving it on. That is the wrong approach in your view.

Anne Stevens

I do not know what their plans are. I have not seen what their assumptions are or how they are going to improve it. I can talk about how we have improved that business. When we look at our competencies and how much improvement is left, there was very little, as we developed Project Boost, in powder metallurgy, as compared to aerospace and driveline. We felt that this was the right time, and it was very strategic, to build these two strong UK‑listed entities, to take that, reinvest it back in the company and return it to the shareholders.

Stephen Kerr

What other parts of the business do you intend or expect, shall we say, to sell? I mean non‑core businesses.

Jos Sclater

There are some parts of the US business. Our focus now is on improving them, but there are bits of it that are getting commoditised quite fast. Five‑axis milling is actually quite hard to do in the US and be competitive, because now people do it in low‑cost countries. We will try to keep improving the spindle speeds and the throughput, but if we just cannot get those businesses to be competitive against low‑cost countries, we may have to sell them on and they may be non‑core to us.

Stephen Kerr

What kind of timescale are you giving yourselves?

Jos Sclater

On those, we have said we are going to work on fixing them for the next two or three years. Then we will look at whether or not they have a long‑term future with us. We are really more focused on design and build. We like things like our engine programmes, where we have design authority and are making large, structural parts of the jet engine. There is much more value‑add for us when we can design and build. Just cutting metal is not really our core competence. Where we do not have value‑add through design, that is probably non‑core to us.

Chair

You plan to make big changes to the business as well. What will that mean for jobs in this country over the next year and perhaps over the next five years?

Anne Stevens

With the programmes we have, we are still a growing company. If you have a growing company and a strong company with technology, you have jobs. As you have openings, you hire people. Yes, we have some programmes like Industry 4.0 where we will automate, but we work with our partners in the unions so that we can replace robots with people.

Chair

The problem, Ms Stevens, is that your critique of Melrose is that it has not given detailed plans; you do not know what its plans are for the business. But we as a Committee are not that sure about what your plans for the business are either, because they have evolved quite quickly in the past few weeks since the Melrose bid. What I am asking is this. What is the outlook for jobs in this country if the current management continues to run GKN? Will there be more jobs in the UK in a year’s time or in five years’ time, or will there be fewer jobs? Can you not make that commitment because you plan to sell off parts of the business?

Anne Stevens

We have a growing company. We have 14 different locations in the UK. We have jobs in those locations today. As the company grows, of course we will have people who will need to fill those positions.

Chair

Today, Moody’s has changed the outlook on the ratings for GKN from stable to negative. It says those changes reflect the accelerated and more specific plans to separate GKN into the aerospace and driveline businesses, which would likely result in a weaker credit profile. Do you understand why Moody’s has made those changes?

Jos Sclater

It is the uncertainty we are currently facing. It is quite natural for rating agencies to put people on negative watch when it is a bit uncertain what exactly the balance sheets of those two companies will look like. However, we know from our own internal modelling that we can get both of those two entities to the investment grade. I understand it, but I am not concerned about it. We are intentionally creating balance sheets that give both halves investment grade ratings.

Drew Hendry

You talked in previous answers about your long‑term vision and your long‑term investments. Mr Sclater, you talked about investing for your grandchildren. If that is the case, why did you allow the pension schemes to fall into deficit?

Jos Sclater

We would prefer that they did not fall into deficit, but they went into deficit because interest rates have gone against all pension schemes—not just ours, unfortunately. Because it is a very big liability, as interest rates go down, the return on your investments gets worse. We all implicitly understand this. Money in the bank does not earn any money now. It is the same dynamic on a much larger scale with a pension scheme. Unfortunately, as investment returns have dropped, the deficit has gone up. Because of that, we have been very keep to grow the company. As the pension scheme has grown, we have wanted to outgrow the pension scheme by continuing to grow the company, which we have done successfully. The good news is that last year we made £680 million of profit, which is easily enough to cover the contributions to the pension scheme. As you probably know, we put £250 million as a bullet payment on top of our normal contributions into the scheme last year, to make sure it is financed to cover pensions for the next 70 years.

Drew Hendry

You have been looking at filling the gaps that have been created. What recent discussions have you had with the trustees about meeting the £150 million cash injection from Melrose?

Jos Sclater

I do not know exactly what Melrose has agreed, or whether it has agreed anything, with the pension scheme. We have an agreement in principle of what it would look like on a demerger with them. I have talked to them about that. We have always had a constructive relationship with the trustees. They are independent and they take their duties very seriously. Of course, at least in my five years here, and probably for more, we have had proactive engagement with the regulator. We have always tried to work hard to make sure we have a constructive relationship with both the regulator and—

Drew Hendry

Have you had discussions with them about a further injection of that sort?

Jos Sclater

Yes, it is agreed in principle.

Drew Hendry

Why do you have reservations about Melrose’s records on pensions? What evidence is there that it does not fund them adequately?

Jos Sclater

I do not have anything to say about its previous record. I would frame it more like this. It is basically planning to use my balance sheet to pay our shareholders the cash element of the takeover, which significantly increases the leverage in GKN. If I look at it through my eyes, why do I not just gear up my company, so borrow more, and pay it to the shareholders? My answer would be that it is a really, really bad idea for the pension scheme. I am just increasing my debt to give the money to shareholders, which gives the pension trustees a more indebted company to support the pension scheme. In terms of what I would expect the pensions trustees to do, if I geared up as much as Melrose is proposing to do, I would de‑risk the investment strategy and put more of it into less risky assets like Government bonds. As it moves to a more conservative investment strategy, that increases the size of the trustee deficit. As that increases, you get into this vicious circle. You have borrowed more from your banks and your pension scheme changes to a more conservative strategy, which puts the pension debt up, which means you have to put more money into the pension scheme. You can get this downward spiral, which is why I have always been extremely keen to keep the company at investment grade. It is the right thing to do for the shareholders, because automotive is quite cyclical. It is very cyclical, as we saw in the last credit crisis. But also, if you have a big pension responsibility for the next 70 years, my view is that the prudent thing to do is to keep the balance sheets at investment grade.

Drew Hendry

Why was the action to address the pension deficit not taken much sooner?

Jos Sclater

We have taken action all the time on the pension scheme. We put money in every single year. We have had a couple of goes at putting in large lump sums. I do not think anyone could have predicted Brexit, but unfortunately that also pushed the interest rate down, which increased the size of the deficit. But that’s life. We understand it. That’s why we are focused on recovering the situation and why we have a recovery plan with the pension scheme. It is why we have put in £250 million last year. Incidentally, we put £250 million into the pension scheme, and the dividend to the shareholders was £150 million. We have been extremely responsible in the way we have dealt with our pension scheme.

Chair

Are you aware of any concerns the trustees have with the proposed takeover? Have you spoken to them about this?

Jos Sclater

They are quite good at keeping it confidential. They have not shared anything with me. They did tell me they do not have an agreement with Melrose as part of this deal, which slightly surprised me. I obviously saw the letter from the regulator yesterday. But I do not know exactly what those discussions are and exactly how far apart they are on their agreement.

Anna Turley

Could I ask about your role in supplying the United States defence industry? How important a supplier are you to the US military?

Anne Stevens

Of our aerospace portfolio, about 25% is military.

Anna Turley

You mean in the US specifically.

Anne Stevens

Yes.

Anna Turley

Can I ask about conversations you are having with other United States companies? There has been some media coverage about a potential bid with Dana in the US. Are you in discussions with other companies? Would you consider selling, perhaps, to a foreign company over a British company?

Anne Stevens

We cannot discuss a hypothetical situation. We obviously receive approaches. It is our duty to look at anything that comes in and make a recommendation to the shareholders, just like with Melrose’s offer. When that came in, it was thoroughly evaluated by the board as well as our financial advisers. Looking at it in depth, it significantly undervalued our company. We are recommending a rejection of the proposal. We seriously look at any offer that comes in.

Anna Turley

In terms of your relationship with the US military, what impact might a takeover have on that? Does it throw it into any sort of jeopardy?

Anne Stevens

I obviously cannot speak for the US military, but what would be required is the approval of CFIUS. As I understand it, Melrose has applied and it would be up to CFIUS whether to agree or not.

Anna Turley

Should the Secretary of State in the UK have any national security concerns about changes in ownership with the takeover?

Anne Stevens

As I have said, I certainly could not speak for the UK Government or the Secretary of State for Defence.

Anna Turley

Is there anything else you would like to say about your importance to the defence industry in this country?

Anne Stevens

We provide products to the defence industry. We provide products for the A400M and the Typhoon. We have a repair‑type facility with some aircraft that are still flying. We supply some parts to other military aircraft as well, but we are not a direct supplier to the defence industry. It would be up to the industry to determine whether it is an issue or not.

Chair

Can I ask a couple of other questions about the conversations you are having with the US car supplier Dana? When did those conversations start, Ms Stevens?

Anne Stevens

We cannot comment on a hypothetical. Obviously, any conversations we have are in confidence.

Chair

But they are all over our newspapers, Ms Stevens. Can you confirm that you are having conversations with Dana about some sort of merger or combination of your two businesses?

Anne Stevens

Since this has happened, we have had many approaches and we have had many conversations. But the content of those conversations—I am sorry—is confidential at this point.

Chair

In 2006, Dana went bankrupt in the US. It re‑emerged a couple of years later. You have spoken about the importance of investing for the long term and having a long‑term perspective in your business. You made that case very powerfully, Ms Stevens. Does Dana have a similar long‑term perspective and the capacity or capability to make those long‑term plans, given what has happened to it in the past?

Anne Stevens

It is a company I know of in the States, having been an executive at Ford. It was a supplier. It has a long‑term business model.

Jos Sclater

Dana is 105 years old. We have been working with it as joint‑venture partners for at least the last 40 years. Yes, it did go into chapter 11. It has learnt from its mistake and, as a result, since then it has carried a very prudent level of debt on its balance sheet. If you were to look at its balance sheet as compared to what Melrose is planning to do to GKN, it is completely different. In fact, I have the numbers in front of me. Dana is not a highly leveraged company. It understands as well as I do that gearing up or borrowing a lot in an automotive company is a bad idea.

Chair

One criticism of GKN has been that it has taken the Melrose bid to get you to look more fundamentally at how your business is run and what the core purpose of your business is. Is that a fair criticism? How would you respond to that?

Jos Sclater

I would go back to Anne’s previous comment. I can show you on my iPhone a photo of my whiteboard on 6 January, which has the entire strategy that we subsequently launched all written in clear writing—in my writing, in fact. No, none of it is a response to Melrose. It is just unfortunate that it has come over the hill. We always planned to launch the strategy with our results on 27 February. The only thing that changed is we moved it forward two weeks.

Chair

You have mentioned getting clearance from CFIUS in the United States. How long does that clearance typically take? What is the timescale for your shareholders to make a decision on the Melrose bid?

Anne Stevens

I can only mention the advice that we have been given from attorneys who have looked at the process. The process could be a few months; the process could be six months. It is hard to say. A lot of it depends on how many other applications are in there right now. It could be a couple of months, or it could be five, six or even more months.

Chair

What is the timetable for shareholders having to vote on the Melrose bid?

Anne Stevens

The first date is 9 March. The final date is 2 April.

Chair

Shareholders are being asked to make a decision about the future of your business before knowing whether they would be able to be a supplier to the US Government. Is that right?

Anne Stevens

Yes, and I would like to comment on that. In recognising that, we have told Melrose that, if it came to us and asked for an extension for it to get approval, we would happily consider it, because it is not fair to our shareholders to vote on whether or not to accept its proposal without knowing the outcome of the US Government’s decision. To protect our shareholders, we proactively said that we would extend the timeline.

Chair

Anna Turley asked you whether you thought the Secretary of State should call in this takeover bid. Of course, you have said quite rightly that that is a decision for the Secretary of State. But you understand the Enterprise Act 2002 and you understand your business. One of the things Government are considering, I imagine, is whether they have any grounds on which to call in this bid. Given your understanding of your business and the Enterprise Act 2002, do the Government have grounds for calling this in?

Anne Stevens

I have to apologise. I do not understand the Act.

Jos Sclater

I do not think we have a view on whether or not they should do that.

Chair

But are there grounds to do so? You know the extent to which you are integrated in Government defence contracts both here and in the United States.

Jos Sclater

We are not highly integrated into UK Government defence contracts directly. We just make military parts for other people, like BAE, or parts of engines for Rolls‑Royce or Airbus. In the US, our programmes are very much more sensitive. We are on things like the F/A‑18. We make large parts of the engine for the F‑35. We make the stealth coating for the F‑35. We make parts of the black programme. We have been named on the B‑21 bomber, which is the stealth bomber for the US. Our US military presence is very important to the US. That is why we have special security arrangements with our boards in the US, which are quasi‑independent of GKN management in the UK. But I cannot take a view on what CFIUS will do through the process. I would say our US military presence is a lot more significant than our UK presence.

Chair

Are there circumstances in which the shareholder vote could be delayed to allow all the information that is material to this decision to be available to your shareholders?

Jos Sclater

We would have quite liked a delay, but we have now given up on that idea.

Vernon Coaker

Can I just ask about CFIUS? You are quite right about the importance both to the UK and the US of the national security implications and the role of CFIUS. According to the information we have from Melrose, though, initially you refused to co‑operate with CFIUS and Melrose filed the application unilaterally. It encouraged CFIUS to compel GKN to provide what you have just given to this Committee. Is that right or not? I do not understand. Is that correct or wrong? What would you say?

Anne Stevens

Any time we receive a request from a government authority, we are clearly going to respond to it. There has been no attempt on our part to not respond to questions from CFIUS. We have responded to CFIUS.

Vernon Coaker

You have now responded to CFIUS.

Anne Stevens

Yes.

Vernon Coaker

Okay, that is fine. That was just so that I am clear you put that into CFIUS.

Chair

Thank you very much, Anne Stevens and Jos Sclater, for coming to give evidence to our Committee this morning. We will now hear from Melrose. Examination of witnesses

Witnesses

Christopher Miller, David Roper and Simon Peckham.

Chair

Thank you very much for coming to give evidence to us this morning. I think you were here for the previous session with the executives from GKN and you heard what they have to say.

Albert Owen

Good morning. What makes you think you can do a better job of running GKN than the existing management team?

Simon Peckham

I will just say first that we are the three founders of Melrose. We welcome the opportunity to answer your questions today. We hope to deal with any misunderstandings that there are. We accept that GKN is a great British business. However, we would say that it is a business that has lost its way, partly due to the way it has been managed. Our ambition is to merge GKN and Melrose together to make a bigger British manufacturing powerhouse that can better compete on the world stage. Melrose is a highly successful UK‑listed company in its own right. We buy businesses to improve them. We have an outstanding track record on pension schemes, which no doubt we will cover later. We invest in research and development. It may surprise you to find out that we invest more than GKN does. We also invest in skills and capital in our businesses, and we have a model that says we manage and invest in businesses as if we are going to own them for ever. Our actions, we believe, are in line with the Government’s industrial strategy. Essentially, the question here is, which is the best management team to run GKN for the interests of everyone going forward? To answer your question, collectively here, we have been doing this activity since the 1980s. Admittedly I used to work for these two at that stage and they had more responsibility for that. There was a company that preceded Melrose called Wassall. We engaged in similar activity, which was looking for underperforming companies and rectifying that underperformance. Companies we bought at that stage include General Cable, which is currently quote on the US stock market—or at least I think it is. We floated that business, having bought it. We also bought a business called TLG, which is a UK lighting business, and a business called DAP, which is a caulks and sealants business. That is ancient history, I accept. Moving on to Melrose, since 2003, when we floated the business on the AIM‑listed market, Melrose bought companies called McKechnie and Dynacast. McKechnie was an aerospace business. We accept it was not the size of GKN’s, but it was still an aerospace business supplying to many of the platforms GKN does. We bought a business called Dynacast, which is a die‑casting business. We bought a business called FKI, which is another UK industrial conglomerate. The last two acquisitions we made have been a company called Elster, which is a metering business, and a company called Nortek, which we are in the business of improving at the moment. Both of those last two businesses were US‑quoted businesses that we have given UK‑based investors the opportunity to benefit from and bring wealth into the UK. We think we have a different strategy for GKN. We think its strategy is wrong. We can start with its current strategy, which seems to be to sell lots of the businesses we would not sell at this time. If you step back more fundamentally, we think GKN has a concentrated business model of sucking things up to the centre and running everything from the centre. We do not agree with that. What we believe in, and the way we run businesses, is putting the power to run those businesses back into the hands of the operational management. We tend to find those operational managers know what is wrong and know they are being obstructed by the operations of a central bureaucracy. When you free them up and incentivise them, we find it drives performance and improves a business.

Albert Owen

That is interesting. You mentioned size; you said, “It was not the size of GKN.” You have given your recent history. In the past, you have purchased and taken over many other companies, but not of this size and significance. What can you offer differently to the management of this one, given that you have not had the experience of a takeover of a company this large?

Christopher Miller

It is true that this would be the biggest acquisition we have made. But, relative to our pre‑existing size, most of our acquisitions have been substantially bigger at the point of acquisition. From our point of view that is not a new departure for us. If I can amplify what Simon was just saying about our management methods, we do not believe in top‑down management. We believe boards are there for there to be strategy and for performance monitoring, and obviously for a number of other things, but principally for those two things. They are not there to take decisions for the businesses. That is a key part of what we believe.

Albert Owen

We have heard a lot about the other companies you are willing to acquire, but I just want to hear from you now. We have had the session with GKN. We want to hear what you are going to do differently. I presume you are going to be less central in the way you deal with things. What is your structure going to look like? Given that you have admitted you have not had experience of these large company takeovers, what are you going to do differently?

David Roper

Can I contest that?

Albert Owen

I am only repeating what has been said.

David Roper

I just want to address your original point. The business we sold to Honeywell, Elster, we sold for £3.3 billion. That of itself is of a comparable size to the individual constituent parts of GKN. I would admit, as Christopher has said, that this is larger than any other single deal we have done, but in terms of individual businesses it is not on a completely different scale to what we have looked at before.

Chair

This is £7.4 billion, which is more than twice as big. It has constituent parts, but it is an order of magnitude bigger than anything you have undertaken before, Mr Roper.

Albert Owen

I am still waiting for your answer about what you are going to do about the structure. How is your structure going to be that much different? How confident are you that you can run this?

Simon Peckham

We are totally confident. From a structural point of view, we will remove the board. We will restructure the head office, and we have been very open about that. We will put the power from the head office back into the individual businesses. We will talk to and agree a plan with the individual business heads of those three core businesses, and we will put that plan into effect, which is what we have done in every single acquisition we have done.

Albert Owen

Will it be run internally or externally? As a company, will you be recruiting experts in this new merger?

David Roper

No.

Simon Peckham

We are already in the business.

Albert Owen

The existing management team will be running it.

Simon Peckham

Essentially that is our plan, yes.

David Roper

It will not be run by McKinsey, let’s us put it that way.

Albert Owen

How will you pay for it? How are you going to fund this purchase?

David Roper

Perhaps I should answer that, as it is about the debt. There have been lots of criticisms thrown at us about being highly leveraged, et cetera. We believe that an appropriate level of debt in companies is good. Obviously, that begs the question: what is appropriate? Nearly 30% of FTSE companies carry the same level of borrowing ratio that we do. Significantly, when we deal with the commercial banks, our lending banks, we deal with the investment-grade departments there rather than the leveraged finance departments. The bottom line is that we borrow on investment‑grade terms. As a package, we think we have a prudent structure going into this business. Indeed, with Nortek we started off with a leverage ratio, as they call it, of 2.5 times about 18 months ago. We are down to below two now.

Albert Owen

Mr Roper, in your letter to us, you said that the company, as it is currently run, represents pension funds, local authorities and insurance companies. Those are the main funders of your company at present. For this acquisition, you are now going to add debt to it to pay it off. Are you going to look to your existing shareholders and ask them for more moneys as well?

David Roper

The essence of this deal is effectively: who is the better management team to improve this great business, GKN?

Christopher Miller

To be clear, 80% of the consideration for the acquisition is in our shares; 20% is in debt.

Albert Owen

The 20% of it is increased borrowing. You will increase the borrowing.

Christopher Miller

The level of debt we propose to put in—it is called 2.5 times leverage—is the standard level that we use in all our acquisitions. We have managed to get that level of debt down substantially and quickly in all of them.

Albert Owen

Sure, but can you understand, in the current climate, that people are worried? Many companies feel they are too big to fail, yet all they are doing is increasing their debts. Do you understand the climate that we are in? This is a company of a size that you have never acquired before, and you are going to fund 20% of it with extra debt.

Christopher Miller

It is not extra debt, if I may say so. By the way, the borrowings we will have are not just against GKN; they are against our own balance sheet of £4 billion as well.

Albert Owen

They are against the new company, as it would stand.

Christopher Miller

They would be against the combined £10 billion‑plus company. Our position is that we have done this many times.

Albert Owen

Mr Roper, you are saying you understand this. What safeguards are you going to put in place?

David Roper

We understand. What we are saying is that we have done this before. We think the level of borrowings we are taking into this transaction is a prudent level of borrowings. This is what we have done for the last 30 years.

Albert Owen

Have you done it in this kind of company before?

David Roper

Yes.

Albert Owen

You cannot just have a three to five‑year plan. You have to have a long‑term plan for these types of investments. Have you done it before with this kind of company?

David Roper

Yes, we have, although not at this scale.

Albert Owen

That is the concern people have.

David Roper

As Simon said, we manage all our businesses as though we are going to own them for ever. We have a strapline that says “three to five years”. There is nothing magical about three to five years. What we aim to do is make businesses better.

Albert Owen

Why do you mention it?

David Roper

When we first started, to get the money from the stock market, it was essentially to try to differentiate ourselves from the conglomerate model that we had been in the 1990s. Therefore, we felt we had to have something, and that is something that has just stuck with us. At the end of the day, we are building businesses for the long term, and we believe that, if they are better businesses, they will be worth more and we will then be able to sell them to a good home.

Simon Peckham

May we just step back a bit? If we combine the two of these businesses together, we end up with probably a business that has a market capitalisation in the region of £10 billion. It would be about a FTSE 50 company. We end up with a profit of about £1 billion. We bring about £300 million. If I am generous to GKN in how we treat the accounting write‑off, it has around £700 million, in an overall sense. We believe a company should borrow money. We all borrow money. Basically, it is not a wrong thing to do. The thing to do is to judge how you do it.

Albert Owen

But this borrowing will expose shareholders to additional risk. Do you accept that?

Simon Peckham

I think, in terms of shareholders, it is an appropriate and prudent level.

Chair

How much are you borrowing in total to finance the £7.4 billion takeover bid?

Simon Peckham

The total bank facility is £4.5 billion.

Chair

You are borrowing £4.5 billion.

Simon Peckham

No, the total bank facility is £4.5 billion. It has £1 billion of free capacity in it. The total borrowings would be in the region of £3.5 billion. We have £1 billion of spare facility that we have built into this structure.

Chair

You are borrowing £3.5 billion to acquire this company.

Simon Peckham

It is not just to acquire this company.

Chair

That was my question, Mr Peckham. How much are you borrowing? You keep saying, “That is not what we are borrowing.” Just answer the question, then. How much are you borrowing to acquire this company?

Simon Peckham

Please, I am trying to answer your question. We are borrowing £3.5 billion, but to buy the company is £1.4 billion of that. We have to cover the borrowings we have and the borrowings it has as well. In terms of the borrowing makeup we have, there is £1.4 billion to fund the cash element, which we accept. The rest is to deal with the working capital in the business.

Christopher Miller

It also covers the existing debt.

Simon Peckham

We have £1 billion headroom.

Chair

You are borrowing £1.4 billion to buy the business and £3.5 billion to cover the borrowings that GKN—

Simon Peckham

The £1.4 billion is included in the £3.5 billion.

Chair

How much of the new business will GKN investors own?

Simon Peckham

At the level of our current offer, 57%.

Chair

When you say “current offer”, does that mean your current offer is not your final offer, or is that your final offer?

Simon Peckham

As you know, I cannot comment on that.

Chair

At the moment, the value of your bid, £7.4 billion, values a GKN share at £4.18. Is that right?

Simon Peckham

It varies on a day‑to‑day basis. I confess I have not looked today, but that will be in the right region, yes.

Chair

Currently, GKN shares are trading at £4.29. Is that right?

Simon Peckham

Probably, yes.

Christopher Miller

Approximately, yes.

Chair

At the moment, you are offering less than what it is currently trading at. Is that correct?

Simon Peckham

That is correct.

Chair

That was different from when you put in your bid. That suggests the value of GKN is now higher than the £7.4 billion you are bidding for it.

Simon Peckham

As a matter of fact at this moment in time, that is correct

Chair

Usually, when you have bid for and taken over other companies, you have paid a higher premium over the market capitalisation of those businesses. Is that correct?

Simon Peckham

The premium varies business by business. You cannot draw a comparison one to another, I am afraid.

Chair

You have mentioned already this morning quite a lot of the companies you have previously taken over, such as Nortek and FKI. What premium have you paid over the market capitalisation when you acquired those businesses?

Christopher Miller

The acquisitions you are referring to in our past were cash acquisitions. In the most recent two, the shareholders were taken out entirely for cash. FKI was a little different. In cash offers, it is traditional to offer a much higher premium, because you are paying for the future that that company might have had with its own shareholders. You are paying them off for the things they might have expected to get. This is substantially an all‑share offer. What we are really doing is changing the name on the share certificates and changing the management team. The growth that we expect and hope to be able to get out of GKN will flow through to those shareholders. In those circumstances, premiums offered tend to be lower because they get the future benefit.

Chair

What was the premium on Nortek and FKI, for example?

Christopher Miller

It has been about 30% at the time of launch.

Chair

For GKN at the moment your offer values the company at less than what it is trading at the moment.

Simon Peckham

At the moment, yes. Obviously, the share price has moved around considerably, even on a daily basis.

David Roper

At the outset it was significantly higher than that, and obviously the market has come up to match the value of our offer.

Chair

Yes, as they are looking at the GKN Project Boost compared with the bid that you are making, perhaps. Albert Owen asked about what you were planning to do in terms of management structure. I think what you have said is you are going to sack the board, not bring anybody else in, and allow the people who are running the individual components of the business to make more decisions. You are not bringing in anybody new. It will be you three and your board who are running the business. You are not going to try to put in anybody else to oversee it. In a way, you will be spreading yourself a lot more thinly than you are currently.

Simon Peckham

There is work to do at GKN. That is quite clear from the conversation we have had today. Yes, we are totally happy we can do that. There is a Melrose head office as well. It is not just the three of us. There are lots of people who work very long and hard hours for us. We will absolutely try to work with the management teams and the operational management, and we very much hope they will do that. No, we are not going to bring in a McKinsey consultant to tell us how to run the business.

Chair

No, I am not suggesting a McKinsey consultant. What I am suggesting is at the moment your board runs a company that has a market capitalisation of, I think, just over £4.2 billion. You are planning to add to that a business with a market capitalisation of £7.5 billion, and you are going to do that without adding any extra capacity. You are going to triple in size, sack a load of people and run the business like that.

Christopher Miller

I see how that can look like a conundrum. The board will go, and that is not because it is some vindictive act. It is because it is duplicative. Two public companies do not need two head offices and those functions. In our view, the businesses should not be run by the board, except in the ways I mentioned earlier: strategy, monitoring and so on. The business is run by the people in the businesses and they will not be in the head office, in our view.

Albert Owen

That will mean job cuts.

Christopher Miller

I am afraid we have already said in terms of head office there will be some duplicative functions that are not required.

Chair

It is just this worry, which I would certainly have, that you already have to deal with challenges in the businesses that you have acquired, like Nortek, for example, and particularly with Brush. You are then going to take on something twice the size of what you are currently running and not add any extra capacity to do that.

Simon Peckham

If I can step back, as the curators of this business, and as the eighth largest shareholders’ collective in the entire of Melrose, we think as owners of this business. We would not move on to a next acquisition unless we were happy that Nortek was being run by the management teams on the philosophy we just talked about. Brush is a problem. We are not walking away from that and we are not walking away from Brush either. Brush was part of an overall larger acquisition of FKI, and we will make sure it gets sorted out. It has a proper well‑run management team that is doing that right now.

Chair

But you will not have the same resources to dedicate to Brush if you are also going to now be running a company twice the size of what you currently run.

Simon Peckham

We are happy we can manage that. If we needed to bring in additional resource to help we would, but we think we will be in a position to run the businesses with the divisional management teams and get GKN back to where we think it should be.

Mark Pawsey

I wondered if I might ask how well you know the business that you are hoping to acquire.

Simon Peckham

Reasonably well, I think, as far as we can know from the outside. We do not have the details of the individual numbers for it.

Mark Pawsey

Do you have any information that is not in the public domain?

Simon Peckham

No.

Mark Pawsey

Have you had any discussions with GKN personnel at any level?

Simon Peckham

It would be inappropriate for us to talk to GKN employees.

Mark Pawsey

How can you be confident about your plans if you do not know the business? You are not a friendly acquirer. You have not had information shared with you. How do you know that you are going to be successful?

Simon Peckham

We have been around this marketplace with GKN in varying different ways since 2003 on our flotation. We have employed people in our business who used to work at GKN.

Mark Pawsey

There is a window into their business through personnel who have moved from one organisation to another.

David Roper

A window into the way they do things, yes.

Simon Peckham

You can now do a considerable amount of analysis from public sources, and we have spent a lot of time doing that. We have talked to people in the industry. We have talked to people, as I said, who have had a past with GKN. You do a balance of where the risk and reward is from the outside. I am trying to think of a nice way of putting this, but I cannot. The opportunity created by the GKN management is just so big, in the sense that it has underperformed so much that there is enough to go for. When we put this proposal to shareholders, we said in our original presentation, which is available on our website, if we just achieve GKN’s expectations at the top end of what it says it can do, that would be enough to justify this acquisition. We believe that is what we can do.

Chair

If you could just achieve the top end of what GKN says it is going to do, that is great, but you do not have the experience or necessarily the capacity.

Mark Pawsey

How do you know you have the right information? How do you know you are working on the right data to be able to make the claims and plans that you have?

Simon Peckham

We are working on the data that GKN provided. It is a public company. There is an awful lot of data in the marketplace, particularly if you look hard for it. We can look at what some of its competitors do. We can look at its competitors on the American automotive side. We can look at its competitors in aerospace. Powder metallurgy is an exception, but in many cases they are also quoted companies, and you can compare and do the analysis. What you cannot know is exactly what the solution is, but you know that the business is underperforming. In a way, this is a slightly unusual case, because if you approach companies they generally tend to say, “No, we disagree with you.” What GKN did was make our bid public. We did not. The first thing it did was effectively agree with us.

Mark Pawsey

They talked us through it. They already had those plans in place. You are sceptical about that.

Simon Peckham

To be honest, I was sitting at the back of this room smiling, because, if I heard it correctly, Jos said that he had a whiteboard on 6 January in his office. I may have misheard him. What he did not say was that the first phone call from Melrose to their adviser was on 5 January. I did it. I rang JP Morgan, which is their broker, on 5 January, saying I wanted to arrange a meeting, chairman to chairman, on the Monday, so he would have known. It is quite clear what that means. He would have known that we were coming.

Mark Pawsey

How could you reassure the Committee that you have the information you need, you are in it for the long term, and we are not going to see you, if you are successful, in a number of years slowly selling off businesses and breaking up what many people would see as a great British company?

Simon Peckham

We have an obligation to set out our intentions under the panel. We have been very clear and we have done that. We are not going to evade your questions. Very simply, we have said that the powder metallurgy business is not core. We will look to sell it in the medium term. We made the CFIUS filing, so that is between year 1 and year 4. We do not think it is the right thing to do to sell it in the next 12 to 18 months, because we think there is further improvement in that. We are looking for more of a long‑term view on that, but we will sell it within a five‑year period. We set the agenda for driveline and aerospace as well. We basically said, “We say we have a three to five‑year strapline, and we have always said that. We do not put anything whatsoever into our funding structures that requires us to do that.” We are quite happy to hold businesses for longer. We are quite happy to go back to our shareholders if necessary and say, “This is the wrong time to do something now. We will keep this business.”

Mark Pawsey

Could we be confident that in five or 10 years’ time the structure, leaving aside the powder metallurgy business, would be broadly as it is today?

Simon Peckham

No. We have said, between years 4 and 5, we will sit down and work out what the right thing to do is. I cannot give you a commitment about 10 years’ time, but we have set out very clearly in our offer document exactly what we mean.

Christopher Miller

There was part of your question that I do not think Simon answered, which is about longer‑term growth. Because we have the strapline that has slightly been foisted on us of three to five years, it possibly implies that we are short termers. That is a word that can be thrown at us. David also said that we own every business and treat it as if we are going to own it for ever. That means we invest in capital, research and development, people and processes. We are prepared to be brave. When we bought Elster, which was two acquisitions ago, it was in the middle of deciding how to get into the smart meter market. For a longstanding business, 100 years old, that made mechanical meters, it was a big move. This is into high tech, software and so on. It was unsure as to how to do it. It asked us to get involved in that process. Over a six or nine‑month period, we helped it come to a decision. We put extra money in for processes, people and equipment. This was very early days and not when it was a profit‑making product. We helped to position it in the right place so that, when Honeywell came along a year or two later, it paid a fantastic price, frankly, for that business. That is the sort of thing we do. We position businesses for the future.

Mark Pawsey

Say somebody comes along, offering a fantastic price for a part of the business. I get a sense that GKN has a strategy that keeps GKN as it is. Your attitude would be rather different. If somebody comes along for a bit of GKN that you have smartened up, you would be more than happy to dispose of it.

Simon Peckham

In fairness, I do not want to say what the GKN strategy is. It is not my place. The GKN strategy, as I can see it, is to sell powder metallurgy in the next 12 to 18 months. It is pursuing sales talks right now with driveline for Dana. You would not do that if you were not contemplating it. If you had no intention of going through with that process, why on earth would you waste the time talking to Dana? It is looking to do that transaction. In aerospace, I accept that may be a longer timescale than we are talking about. In terms of how you look at the businesses right now, you may find this ironic, but we have a slightly longer‑term strategy than GKN. I would combine that with Chris. By the way, on Elster and Nortek, we spent nearly double as much on R&D as they spent. We are developers and growers of businesses. We like to make our businesses better. We do not just do that as a charitable gesture. We entirely accept it is part of growing the equity and value of a business. It is what makes it safer for everyone in the long run, including the UK economy.

Mark Pawsey

Mr Peckham, in your earlier remarks, you said that Melrose’s acquisition of GKN would be in line with the Government’s industrial strategy. How so?

Simon Peckham

That is pretty much what I just said. At the end of the day, we want to invest in R&D. We want to develop these businesses. We want to grow them. We want to improve them. We want to take a GKN business that we think is currently underperforming. We have access to the capital markets in a way we do not think it would have. What we have not mentioned here is that, for Elster, we raised £1.2 billion to buy that from the UK market. For Nortek, we raised £1.6 billion a week after Brexit—credit to the UK capital markets. We have access to that ability to build GKN, if it is the right thing to do, and more flexibility to do that. I accept we are not saying we are going to hold these assets for ever. We are not sitting in front of you misleading you. While we own them, we will operate and run them as if we are going to own them for ever, including investment. Very kindly, one of our chief executives from the past sent a letter to the Committee, a guy who used to run Bridon. He was very kind about the fact we invested in the R&D programme there. We built a brand new, state of the art factory for these guys up in Newcastle, which you can probably tell from the accent is where I come from. The other thing he did not mention and we did not look at is a small thing, but illustrative of how we think. Bridon had been trying to get a fibre rope business for years. One came up while we were in the middle of discussions to sell the business to Ontario Teachers’ Pension Plan. You could not find a better owner, you would think. We went out of our way to do that deal, even if it was an inconvenience for the transaction, and frankly it was. We still did it, because it was the right thing to do for our businesses. I am flanked by these two guys, with whom I have worked for a very long time. One of the great things they have always taught me is: “Do the right thing here.” One of the things I am proud about with Melrose is that we have a great track record of trying to do the right thing by everyone. We are not a charity. We are a business, but we try to do the right thing.

Peter Kyle

Mr Peckham, have you ever owned a company for ever?

Simon Peckham

No.

Peter Kyle

How do you know what it is like?

Simon Peckham

I would not. I do not know what it is like to own a company for ever.

Peter Kyle

You say that your strapline is three to five years, but you act as if you are going to own it for ever. You do not know what that is like.

Simon Peckham

Maybe it is a strapline, and maybe it is a soundbite. The bottom line is, when we sit down and make investment decisions, we try to make them so that, for the long run, the business be put in the best place possible.

Peter Kyle

You do not know what it is like to own a company for ever. Your whole business structure is short to occasionally medium term, but you just throw out there that you are owning it and investing in it as if you are going to own it for ever. You cannot have both psychologies at the same time. It is a soundbite that is meaningless.

Christopher Miller

There is a bit of a dichotomy. Maybe we are not explaining ourselves very well. The process of the three to five‑year strapline is, admittedly, three to five years and therefore relatively short term. That is maybe our ownership period, but in our ownership period we do the things for those businesses that anybody who owned it and was going to own it for ever would do. They get all the capital investment. We stand on our track record.

Peter Kyle

Except nobody, as a manager, would look you in the eye and think you are going to be here for ever. That is a key thing about an ownership model that lasts for ever. All the staff know that you, as managers, are going to be there for ever, but with you they do not know that.

Christopher Miller

I would contest that.

Simon Peckham

I would disagree with that. The trouble with saying you are going to own a business for ever is the—

Peter Kyle

You said it, not me.

Simon Peckham

Sorry, excuse me. The trouble with saying you are going to own a business for ever is that you can always put off to tomorrow a decision that you could take today. The three to five‑year strapline that we use is a metaphorical sand clock in our office.

Peter Kyle

Let us leave the metaphors to one side and crack on with reality. You have said that you want to create a speedy, flat and non‑bureaucratic organisation. What will that mean in terms of the granular effect on management structure? What will the impact be? How will you create that speedy, flat and non‑bureaucratic organisation?

Simon Peckham

As we have explained, the board will go and we will restructure the head office—not because we are vindictive, but because it is necessary as part of the business. We will put ourselves right next to the people who operate the businesses, so that we will be directly in contact with them as they run the businesses.

Peter Kyle

You can transform a business that employs tens of thousands of people into becoming speedy, flat and non‑bureaucratic, simply by getting rid of the 15 or 20 people who are at board level.

Simon Peckham

I did not say that.

Peter Kyle

What restructures are you planning further down the organisation?

Simon Peckham

We have been very open about it. As we said, we will restructure the head office to remove the central control. We will go to the individual runners of the businesses, come up with a plan for them, tell them the world has changed and explain to them we want to move more quickly and with a better investment philosophy, and we want to try to create a better business and grow the three‑year plan with them.

Peter Kyle

This is what you call “declutter”.

Simon Peckham

That is what we call “declutter”, yes.

Peter Kyle

In reply to Mr Pawsey’s questioning, you said that you did not really have a very detailed, granular working knowledge of the company, day to day, deep down into the company. How can you make these quite firm assertions about what needs to change in the heart of the company without having that working experience of it?

Simon Peckham

What I said was that from the outside there was a tremendous amount of public data available. You can do a comparison to its competitors. We know where all its sites are. We know what the products that it does are. Therefore, we can make an assessment from the outside as to where we think are the best places to go to improve it. Unusually perhaps, as we have gone through this process, we have found GKN management has largely agreed with us.

Peter Kyle

Presumably, mostly you are making your judgments from spreadsheets, data and publicly available information. In the past, what difference is there when you finally get your hands on a company? What difference do you find when you get to sit down with managers and long‑term employees? Is it often different to what you expected from reading the spreadsheets and the data?

Simon Peckham

We find that the personal touch generally works best. We find that we are popular, actually. You may be surprised, but we find that the people who are running these businesses know better than anyone else what is wrong with them and what is right with them. It is an anecdote, I accept, but we had one experience where we had bought a business called Eclipse in the United States for our Elster gas business. Literally the first day we walked in, the guy who ran the business went to his bottom drawer, pulled out a plan and said, “This is what I would do if this was my business.” We implemented that plan for him, which was better than our plan. We find that the people who run these businesses really do know. It is a myth that the boards of companies are all‑seeing and all‑knowing, and know how to run everything. What is not a myth is that they have an effect on how businesses are run. Therefore, if you can take something back to the people who are responsible for it, empower them and give them the incentive to get on with it, we find that that is what makes a difference in businesses. We have a 14‑year track record of delivering these returns. We will no doubt talk about stakeholders in a minute, but purely simply for shareholders, of the 350 companies in the FTSE 350, we are No. 3 in terms of shareholder returns since 2003. If you had invested a pound in Melrose, you would have £18 now. We have made our shareholders a profit of approximately £5 billion over the last 14 years.

Christopher Miller

We have done it by improving the businesses. Otherwise buyers do not buy them for those sorts of prices.

Simon Peckham

Honeywell was prepared to buy Elster from us. We bought Elster for £1.8 billion. We paid 10 times EBITDA for it. We sold it for £3.3 billion, 14 times EBITDA, a profit of £1.5 billion for our shareholders. I am sure we will talk about pensions as well. In that process, by the way, we also used the opportunity to deal with and look after their pensions.

Chair

We are going to come on to some of these, as you say, Mr Peckham.

Vernon Coaker

Good morning. You will know that the national security implications of your proposed takeover have been a matter of considerable concern and discussion. That is not surprising, given that the F‑35, the F‑18, Chinook, Black Hawk helicopters, Typhoon and the A400M are all parts of the military capabilities that GKN are involved with. You will also know the President of the United States delegates authority to consider national security implications of any bids for companies to CFIUS. It is really quite important for us to understand what representations you have made to CFIUS, and what discussions you have had with the US Department of Defence and others about your proposed takeover. What assurances and reassurances have you given to them, and what have they said back to you?

Christopher Miller

Taking CFIUS first, Simon and I have been to Washington. We have been to the Pentagon twice. We have been to CFIUS at the Treasury, and CFIUS at the Department of Defence. We have met other senior officials. We have met Vice‑Admiral Winter, who runs the F‑35 programme. As you can see, we have had a number of discussions. The first thing to say is that we are a British company buying another British company. As it happens, 57% of us will be the previous company. There has not been a single CFIUS referral that we are aware of or have been advised of from a British company that has failed. I think there have been 15 failures in the last several years, 14 of which were Chinese, and the one that was not was not British, so we start from a good place. We filed an application to CFIUS almost immediately. I think it might have been referred to earlier. We did it unilaterally, and we had hoped that the process would then kick off from that point. It did not, because some of the information from GKN lagged. The process is under way. We are in touch with CFIUS. We have advisers in Washington acting on our behalf. From the conversations we have had, we cannot see that there are any issues that cannot be met in the way that they have been met before.

Vernon Coaker

What assurances have you given CFIUS and so on, given the three to five‑year plan that you have, and given that many defence contracts exist on research and development and investments that are sometimes decades into the future? What assurances have you given to CFIUS about long‑term contracts? For example, though it may be UK-to-UK company at the moment, presumably you will have to say, “In three or five years’ time, we will sell off aspects of the business,” as you propose to do. What reassurances have you given CFIUS about who you would sell to? Can you say, “We will not sell to China. We will not sell to Russia. We will not sell to anybody who could in any way conceivably be regarded as somebody we in the West, the UK, the US, would have concerns about”?

Simon Peckham

We can say the third of those, effectively. I cannot pick on individual countries. That would not be right, sitting here in this room.

Christopher Miller

You mentioned the right ones.

Vernon Coaker

This is what I am saying. Many of the contracts that GKN is involved with are long term. They are not short term. In terms of the longer‑term contracts, you have said to and reassured CFIUS that you will not sell to anybody or any country that may be regarded as a threat to the security of our country and our allies.

Simon Peckham

What we have said to CFIUS is that we are British citizens too. I live in this country. My family lives in this country.

Vernon Coaker

Yes, but the question is whether you would sell.

Simon Peckham

We are not going to sell GKN protected military assets to anyone who is not an appropriate buyer of them. We would never do it.

Vernon Coaker

Even at a loss.

Simon Peckham

Even if we were free to do it, we would not do it. As you well know, the CFIUS authorities have the power to stop us. They do not need that power because we would never use it, but they have the power to stop us, as indeed do the UK Government.

Christopher Miller

That is the fall-back position.

Vernon Coaker

Will you wait for the outcome from CFIUS, in terms of it looking at your proposal? Will you wait until it has concluded its considerations before you make a deal or try to make a deal?

Simon Peckham

The situation with CFIUS is as follows. We believe that the CFIUS approval process will happen within the term of the bid. That is our advice, based on our lawyers in the United States. If it does not, we believe that you can agree measures with the CFIUS authorities where they are very happy to allow the process to go ahead. We also believe that is the case. If neither of those were true, GKN, in fairness, and we applaud it for doing this, has said that it would suspend the timetable. I think GKN repeated that statement in here.

Vernon Coaker

It did, yes. Sorry to interrupt. I understand the process. It is perfectly possible for you to come to an agreement with CFIUS that has post‑deal agreements, where you say, “We will do this,” and they are legally binding. I understand that. I am asking for a different sort of answer. Will you wait until you have CFIUS approval before you conclude a deal?

Simon Peckham

The direct answer to that question is no. We think we will get the approval. If we do not get the approval and have agreed measures with them that they are happy for us to close, then that would be enough for us.

Vernon Coaker

The answer is no, you will not wait for full CFIUS approval before you seek to conclude the deal.

Simon Peckham

To be clear—because it is important I phrase this correctly—we absolutely, totally respect the CFIUS authorities and totally respect what they are doing. We would not move against their views, but they have a specified procedure that says that you are able to do this. First, we think we will get the approval. Secondly, if we do not get the approval, basically we are able to contemplate, with their agreement, by the way, going through this process. Thirdly, we will take advice at the time. If that was to be a problem, GKN has very kindly said it wants shareholders to have a vote.

Vernon Coaker

It would be good to have CFIUS approval before a deal is concluded.

Christopher Miller

We are squaring the circle, possibly. With mitigation initiatives, as I think we refer to them, which are assurances from us, it is saying you will get approval but down the road. They therefore allow you to meet the takeover timetable.

Vernon Coaker

Have you met with Congressman Neal Dunn?

Simon Peckham

No.

Vernon Coaker

He is the Florida representative for GKN, including the secret facilities that GKN has there. He wrote to the committee; I think it was that committee. He said that Melrose’s strategy to buy, sell, improve within three to five years put the defence programmes I mentioned earlier at risk, and that, “Melrose has no track record in defence contracting or relevant high‑technology businesses.” He added that Melrose’s acquisition plan revealed prioritisation of operating cash generation. If the deal is allowed, the Congressman said, “Melrose’s strategy will undermine long‑term investments in R&D and secure supply chains, which are critical to major defence platforms GKN supplies.” If you met Congressman Dunn, what would you be saying to him?

Simon Peckham

I would say the same as we are saying to you. Melrose is a good investor in businesses. We will not be a disruptor of supply chains, which is what we have told the CFIUS authorities. We would be able to convince him that his concerns were misplaced.

Vernon Coaker

So he is wrong.

Simon Peckham

I said I think we will be able to convince him his concerns are misplaced.

Vernon Coaker

What about the British Government? What discussions have you had with the British Government about national security concerns?

Simon Peckham

We have had discussions with BEIS and the Ministry of Defence.

Vernon Coaker

As we understand it—I think I am right in saying this, Chair—they are considering whether they should, in effect, call it in and look at it, are they not?

Simon Peckham

You would have to ask them. I do not know what the position is.

Vernon Coaker

We have. Unless I have got it wrong, I think I am right in saying that the Secretary of State at BEIS is definitely considering whether, on national security grounds, he should call this in and look at the proposed takeover.

Simon Peckham

Under the Enterprise Act 2002, as you know, the Government have the power to look at things from a national security point of view. There have been seven investigations under that. None have involved a UK bidder or a UK buyer of an asset. They have all been overseas companies. Actually, all have been approved, with undertakings being given by the buyer. We would make clear to you that, if the MoD had any concerns about national security in respect of this bid, we would of course do everything we can to alleviate them.

Vernon Coaker

The concern is that, in a nutshell, defence is longer term than three to five years. A balance sheet will not reflect the acquisition of defence capabilities and sometimes investments, in terms of a profit margin, which is what you are seeking to improve. In defence of GKN, that is really difficult with defence, because it is so long term.

Christopher Miller

Just getting it in proportion, defence sales of GKN are probably less than 10% of the total, and less than half of that is in the UK.