U.S. Tax Reform Boosts GKN Plan to Rebut $10 Billion Takeover

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By Ben Stupples

U.S. tax reform has bolstered GKN Plc’s attempt to rebuff a 7.3 billion-pound ($10.2 billion) hostile takeover from Melrose Industries Plc in a sign the new law may play a key role in business deals.

In a Feb. 14 conference call, GKN Group Finance Director Jos Sclater highlighted a “tax tailwind” that will help to lower the FTSE 100 company’s future group tax rate by 4 percent to 20 percent.

“This is primarily the result of the changes introduced by President Trump, which reduces the U.S. federal tax rate from 35 percent to 21 percent,” Sclater said. “This change will be very helpful to us given our substantial U.S. business.”

New Strategy

The comments are part of GKN’s strategy to convince shareholders that the global automotive and aerospace components company, a major supplier to Airbus SE and Boeing Co., will provide better value as an independent business. Published Feb. 14, the strategy outlines plans to divest businesses and return 2.5 billion pounds in cash to shareholders over the next three years.

Signed by President Donald Trump Dec. 22, the 2017 U.S. tax act ( Pub. L. No. 115-97) is forcing global businesses to reassess their financial positions through its slashing of the U.S. corporate tax rate.

In a December 2017 report on the new U.S. tax code, global accounting firm PwC said the reforms may lead to businesses carrying out deals paying more attention to tax rates in local states.

“A decrease in the federal corporate income tax rate will increase the significance of a corporation’s state effective tax rate,” the report said. “As such, many companies may increase their scrutiny on driving deal value through implementing more sophisticated state income tax savings strategies.”

Key Market

The U.S. has been a key location for GKN since the 1970s, according to its website. The country is the Redditch, England-based company’s second-largest geographical market by staff number, according to GKN’s 2016 annual report.

In addition to the U.S., Sclater said in the conference call that falling corporate tax rates in the U.K. and Norway will boost GKN’s group tax rate. Norway’s corporate tax rate has fallen to 24 percent from 28 percent in the past decade, while the U.K.’s has dropped further over the same timeframe to 19 percent from 30 percent, according to data compiled by global accounting firm KPMG.

Rejected Bid

GKN said in a Jan. 14 statement it had received an “unsolicited” acquisition bid four days earlier from Melrose, a takeover specialist that focuses on turning around businesses. The bid, the largest U.K. hostile takeover for a decade, “fundamentally” undervalues GKN and its prospects, the statement added.

To contact the reporter on this story: Ben Stupples in London at bstupples@bloombergtax.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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