On the back of this news, GKN's shares hit their highest level in well over a decade.
Melrose seeks to buy struggling engineering companies or manufacturers and then sell them on once they've improved the business.
"The board of GKN has considered the proposal. and has unanimously rejected it, having concluded that the proposal is entirely opportunistic and that the terms fundamentally undervalue the company and its prospects", it said.
"The proposal would materially dilute the exposure of [our] shareholders to the meaningful upside opportunities that the board believes are present within the company", says GKN.
The GKN board has rejected an offer from industrial turnaround specialist Melrose. Those calls became louder after a profit warning in October, which was sparked by the difficulties at its aerospace business. The biggest factory, in St Louis in Missouri, makes air frames for F-15 and F/A-18 fighter jets.
The takeover approach came after GKN sacked its new chief executive in November, weeks before he was due to take the helm at the blue-chip company, and warned of a further writedown at its North American aerospace division. The former Ford Motor Co. executive, 69 will oversee the planned split, creating two companies with "distinct investment profiles and capital allocation policies", it said.
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: "The separation of the automotive and aerospace units has been on the cards for years, with little obvious crossover between the two businesses".
Melrose said on Friday it could significantly improve the performance of both GKN's aerospace and engineering divisions, maximising value for shareholders before any split. According UK takeover rules, Melrose now can make a firm offer by February 9 or walk away for six months.
Following fourth-quarter trading "in line with expectations", GKN foresees a full-year pre-tax profit "slightly ahead" of the £678 million recorded in 2016. Historically, the pension deficit has held the group together, but with the sprawling footprint likely to have contributed to recent profit warnings, the reasons for divorce now seem to outweigh the costs of splitting. "What it hasn't done is generate enough cash from those market positions", one person familiar with the company said.