At the appropriate time, each business will be sold, in order to return value that has been created to shareholders. The Directors are experienced in being able to recognise the appropriate time in the business cycle for disposal, in order to provide funding for acquisitions and return funds to investors.
In August 2012 Melrose acquired Elster, a company listed on the New York Stock Exchange, for £1.8 billion, funded by £1.2 billion of equity and £0.6 billion of debt.
Under Melrose ownership absolute headline profits in Elster increased by 88% and sales growth on average was 2% per year, both at constant currency. With almost all of the sales growth coming from the bolt on acquisition of Eclipse Inc., acquired for £0.1 billion in October 2014, the 9 percentage points increase in headline operating margin was delivered through operational improvements driven by investment in capital expenditure and restructuring programmes, targeted cost savings and exiting low margin sales channels.
On 29 December 2015 Elster was sold to Honeywell Inc. for £3.3 billion and at the same time Honeywell assumed the FKI UK and McKechnie UK Pension Plans. When combined with the Elster pension obligations, these pension plans included £849 million gross liabilities and had a net accounting deficit of £112 million (87% of the Group’s net deficit at disposal date). Elster was an extremely successful investment for Melrose. Since it was acquired the equity value increased by 2.3 times and the equity IRR achieved was 33% per annum.
Consistent with previous deals, and in line with the Group strategy, a large portion of the Elster sale proceeds were returned to shareholders. On 5 February 2016 Melrose returned £2.40 per share, totalling £2,388.5 million. The remaining Elster proceeds were predominantly used to pay down all of the Group’s external borrowing facilities.
In 2013, Melrose sold five FKI businesses:
Truth, Marelli, Crosby, Acco and Harris, which made up approximately half of the FKI group. On average these produced a return on the original shareholder value of over three times.
The combined sale price of these five businesses was approximately £950 million. In accordance with the Melrose strategy, a return of capital was made to shareholders in February 2014 to the value of approximately £600 million. The balance of the net proceeds has been used to pay down Melrose’s existing borrowings.
In 2014 Melrose completed the disposal of Bridon for £365 million, representing a return on original equity of approximately 2.5x.
Following the acquisition of the McKechnie business in 2005, its Aerospace business was subsequently sold for £428 million in May 2007, two years after the initial acquisition. This resulted in acquisition debt being repaid and a return of capital to shareholders of £220 million.
During the six years of ownership of Dynacast, as a result of the improvement in its performance, Melrose quadrupled shareholders’ investment, selling the business for an enterprise value of £377 million in July 2011. Consistent with Melrose strategy, following the disposal approximately £373 million was returned to shareholders in August 2011.
The final part of the McKechnie business, being McKechnie Plastic Components, was sold for £30.7 million in June 2012.
The sale of Dynacast means that nearly £1 billion in cash was generated from the original £429 million McKechnie and Dynacast acquisition.