Court judgment almost wipes out GKN profits

Profits at GKN, one of the UK's largest engineering groups, were yesterday almost wiped out after a US court judge ordered the company to pay $591m (pounds 370m) in damages over a dispute involving its American car exhaust business.

The timing of the final judgment was a complete surprise to GKN executives, coming just hours after the company had reported record pre-tax profits for 1996 of pounds 363m. The group said it would now be making a provision of pounds 270m off the headline profit figures, reducing the figure for last year to pounds 92.8m.

However GKN said it was unlikely it would have to pay the cash to the court in Charlotte, North Carolina, until the outcome of an appeal before a panel of judges, which could take more than 18 months. The company also said the damages would be reduced by a third because some of the 1,000 US franchisees bringing the case had dropped out of the claim. The jury's previous recommendation had been for damages of up to $554m.

The news sent GKN shares surging ahead in late stock market trading, reflecting investors' relief that the scale of the problem had effectively been capped and that previous estimates of damages of $740m had proved too pessimistic. The shares closed 46p higher at pounds 10.20p.

A GKN spokesman said: "We're now on more certain ground and we can get the case out of the mainstream running of the company. But we still have to go through the agonising stage-by-stage appeals process."

The long-running case was brought by garage owners across the US who operated franchise outlets for GKN's American car exhaust fitting service, called Mieneke Discount Muffler Shops. They had claimed GKN had defrauded them by allegedly concealing commission payments made by the garages to the group's in-house US advertising agency. However the early indication was that the claim would not exceed $31m including interest.

Analysts pointed out that GKN was building up its cash reserves at the rate of pounds 100m every year, so if the appeal took two years to come to court the company could have amassed almost enough funds to cover the damages.