(De)Merge Right

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What's going on?

Melrose Industries announced plans on Thursday to spin off GKN’s automotive business.

What does this mean?

Melrose is a well-known turnaround specialist, meaning the FTSE 100-listed company acquires struggling firms, tightens their operations, and re-sells them for a healthy profit at a later date. (Think house flipping, but for businesses instead of buildings.) So when Melrose bought GKN – a British car and aerospace parts manufacturer – for £8 billion ($9 billion) back in 2018, investors knew it would eventually want to cash in on its work. Looks like that time has come: Melrose has spent those years carefully crafting GKN’s auto business – one of the world’s leading suppliers of vehicle drive shafts – into a slimmed-down, polished-up version of its former self. Now it’s planning to separate it from GKN’s aerospace arm completely, and list the newly independent spin-off on the stock market as soon as next year.

Why should I care?

The bigger picture: United we fall, divided we stand.
This is a clever play by Melrose: breaking up GKN lets it focus in on the aero segment while freeing up resources for other potential deals. On top of that, it should help GKN’s businesses steer clear of the dreaded “conglomerate discount” phenomenon, when investors – skeptical about how effectively sprawling conglomerates can manage their various offshoots – tend to value straightforward, “pure-play” businesses more highly. So by splitting up GKN, Melrose is hoping to get more for two parts than it would for one whole.

Zooming out: (Dis)united in our grief.
The pound fell to its lowest level against the dollar since 1985 this week. That’s bad news for the economy, but not so much for GKN and other UK businesses with major business overseas. After all, a weaker pound makes their offerings cheaper to international buyers, so don’t be surprised if a few British CEOs seem less than dismayed by the news.

Originally posted as part of the Finimize daily email.

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