10th Jun 2022 17:56
(Alliance News) - Focus now lies on the GKN businesses after Melrose Industries PLC pleased shareholders with news this week of a GBP500 million share buyback and a USD650 million deal to sell the final asset belonging to acquisition Nortek Inc.
Shares in Melrose closed down 6.1% at 154.35 pence in London on Friday, but the stock still closed with a week-to-date gain of 16%. Over the same period, the wider FTSE 100 index slipped 2.9%.
Melrose kicked off the week by saying it has agreed to offload its Ergotron business to funds managed by Sterling Group.
Completion of the sale is expected to occur in the third quarter of 2022 and is conditional upon customary US antitrust approvals. On or before completion, Melrose will announce how it intends to use the net proceeds, the FTSE 100 listing added.
Ergoton is a manufacturer of ergonomic products such as computer mounts, stand-up desks, and mobile carts. Ergoton achieved an adjusted operating profit of GBP58 million in 2021.
Melrose, having sold the Nortek Air Management and Nortek Control businesses last year, said Ergotron is the last of the businesses remaining from the Nortek acquisition in 2016. On completion, Melrose will have more than doubled shareholders' initial investment, the industrial turnaround specialist noted.
Then, on Wednesday, Melrose said it will launch a GBP500 million buyback.
The GBP500 million programme kicks off tomorrow and will conclude no later than the end of October. All repurchased shares will be cancelled.
Melrose said it has "sufficient certainty" now to begin the repurchase programme.
The buyback announcement is slightly belated, however. In March, it had said it would leave the timing of a capital return "under review", following Russia's invasion of Ukraine.
It had planned to announce a "second capital return" in its March annual results. In June 2021, Melrose had unveiled a GBP730 million return to shareholders after completing the GBP2.62 billion disposal of its Nortek Air Management division to Chicago, Illinois-based Madison Industries.
Edison noted that Melrose has now completed four transactions since 2005, with an average internal rate of return of 28%.
Focus now turns to the fifth deal, said Edison.
"Recovery in the aerospace market and management confidence to lift margin expectations from 12% to 14%+, along with greater disclosure on the engine contracts, suggest [GKN Aerospace] is recovering strongly, albeit value realisation is likely a few years out," said Edison.
Back in 2018, then-London listing GKN accepted defeat and asked shareholders to accept a GBP8.4 billion takeover bid made by Melrose. At that time, Melrose committed not to sell the GKN Aerospace business before April 1, 2023.
The fully restructured GKN Powder Metallurgy and GKN Automotive operations are likely to be exited in the shorter term, said Edison, which should support the investment research firm's 246p-per-share valuation of Melrose.
"Investor attention may also start turning towards the next acquisition and sixth deal," said Edison.
By Lucy Heming; [email protected]
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