6th Jul 2016 07:44
LONDON (Alliance News) - 'Buy, improve, sell' specialist Melrose Industries PLC on Wednesday struck a USD1.44 billion deal to acquire US manufacturing firm Nortek Inc and will back the deal with a rights issue.
Melrose operates a business model by which is acquires underperforming industrial businesses, restructures and returns them to health, and then sells them on. In late 2015, it sold its Elster Group energy metering business to US industrial conglomerate Honeywell Inc for GBP3.3 billion, returning GBP2.4 billion of the funds to shareholders in late 2015. This left Melrose with Brush, an electricity generation company, as its only remaining asset.
On Wednesday, the group replenished its operations with the acquisition of Providence, Rhode Island-based Nortek, a manufacturer of heating, ventilation, air conditioning and home appliance products. In 2015, it reported a headline operating profit of USD220.1 million on revenue of USD2.53 billion, Melrose said.
Melrose said it has identified opportunities to improve the "operational quality" of Nortek's business, including boosting investment in its manufacturing facilities and product innovation, in addition to pursuing bolt-on acquisitions. Melrose also said it would look to boost Nortek's supply chain efficiency and put in place measures to drive market share gains.
Melrose said Nortek is well-placed to benefit from a good market backdrop and solid momentum in the US construction industry and said the company's end market exposure provides a diverse revenue stream. Melrose said Nortek's current product portfolio could benefit from an improved focus and opportunities have been identified to boost margins.
In addition to operational improvements, Melrose said it intends to reduce Nortek's debt costs in order to free up cash flow. Further money will be saved by Nortek's NASDAQ listing being cancelled.
Melrose will pay USD86.00 per share for Nortek, a 38% premium to Nortek's closing price in New York on Tuesday. Melrose said its offer already has support of shareholders representing 68.7% of Nortek, as well as the unanimous support of the Nortek board.
It anticipates the Nortek deal will be significantly accretive to headline earnings in the first year after purchase and thereafter.
Melrose will finance the deal with a fully-underwritten rights issue of 12 new shares at 95.00 pence per share for each 1 existing share, raising a total of GBP1.61 billion. Melrose said it has held pre-marketing meetings with a number of its institutional shareholders who it believes are supportive of the acquisition.
Melrose shares closed in London Tuesday at 410.14p but rocketed higher early Wednesday after the deal was announced. Shares in the company were up 27% to 519.00p Wednesday morning, the best performer in the FTSE All-Share by some margin.
Due to the size of the deal, the acquisition will constitute a reverse takeover, meaning Melrose's shares in the premium segment of London's Main Market will be cancelled after completion. Following this, Melrose will re-apply for a premium listing as soon as is practicable, it said.
A general meeting of Melrose shareholders to vote on approving the deal will be held on July 25.
"Nortek is a high quality manufacturing business with over 90% of its turnover in North America and product penetration into 80% of US households. It serves attractive end markets at good points in their cycle, with strong brands and market positions. Nonetheless there remains solid potential for further improvement under Melrose's guidance," said Simon Peckham, Melrose's chief executive.
"Our ability to apply our industrial experience and investment expertise, as well as to liberate Nortek from its current capital structure will transform the prospects of the business," he added.
The company added that it is trading in line with expectations so far in 2016, with Brush "performing satisfactorily".
By Sam Unsted; [email protected]; @SamUAtAlliance
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