GKN in talks with Dana over auto unit sale

LONDON -- UK engineering company GKN is in talks with U.S. company Dana over its auto business, opening up a new front in its battle to fight off a hostile 7 billion-pound ($9.6 billion) bid from Melrose Industries.

GKN said on Friday that any combination of GKN Driveline with Dana would be effected mainly in equity but gave no details on control.

Seeking to fight off turnaround specialist Melrose's cash and shares approach which it argues undervalues it, GKN already had a plan to separate its main aerospace and automotive businesses by the middle of next year.

Dana confirmed the discussions in a statement early Friday.

"There can be no certainty that any agreement will be reached, and Dana will always act in the best interests of its shareholders," the statement said. "Dana does not intend to update the market further unless and until it is appropriate to do so or a formal agreement has been reached."

The similar sizes of Dana and GKN Driveline -- Dana's annual revenues of $7.2 billion roughly equate to Driveline's 5.3 billion pounds ($7.29 billion) -- plus the fact that any deal would be done mainly in equity rather than cash, led some analysts to question the combination.

"Is it the only game in town?" Jefferies analyst Sandy Morris said. "My snap reaction is I'm not utterly convinced that this is the best option over and above persisting with the demerger...and then seeing what strategic options come along."

For its part, GKN said the potential deal with Dana could provide greater value to shareholders than its demerger plan and it would therefore explore it as an option alongside it.

'Number of approaches'

Other potential tie-ups could also emerge after GKN said the talks with Dana came about after it "received a number of approaches for its businesses," which as well as Driveline include the aerospace unit, a supplier to Airbus and Boeing, and GKN powder metallurgy, which also supplies car manufacturers.

The involvement of Dana, the longtime Toledo, Ohio-based supplier of axles and driveshafts, could prompt scrutiny from UK lawmakers as some politicians have already expressed worries about GKN ending up in foreign hands.

Britain's defense secretary has said he has "serious concerns" about a change of ownership. GKN also makes components for the Eurofighter Typhoon combat jet.

GKN cautioned that the discussions with Dana may not lead to any transaction and its board advised shareholders not to take any action in relation to the Melrose offer.

Melrose shareholders are due to vote at a March 8 meeting on the potential acquisition and the turnaround specialist's plan to issue shares to help to finance the GKN bid.

GKN also on Friday issued a second statement to say it was in talks with its trustees over what a possible demerger of its business would mean for its pension schemes. It had previously warned that Melrose's bid could hit its pension. It said it would make a 160-million-pound contribution to the scheme upon demerger.