Melrose buys good manufacturing businesses with strong fundamentals whose performance can be improved. Melrose finances its acquisitions using a low level of leverage, improves the businesses by a mixture of investment and changed management focus, sells them and returns the proceeds to shareholders.
Melrose is led by a management team which has a strong track-record in the successful implementation of a disciplined strategy, which has seen the company grow its market cap from £13 million since listing on the London Stock Exchange in 2003.
The management team has created substantial value for shareholders. Businesses in the portfolio benefit from substantial investment and changed management focus in order to improve operational performance and drive growth. Melrose works with divisional managers to help improve margins and generate sustainable cash flows and profitable growth.
- Good manufacturing businesses whose performance can be improved
- Use low (public market) leverage
- Set strategy and targets and sign off investments
- Drive operational improvements
- Invest in the business
- Change management's focus
- Incentivise well
- Focus on operating cash generation
- Identify the optimal time to sell, often between three to five years but flexible
- Return value to shareholders from significant disposals
Melrose aims to acquire good manufacturing businesses that are currently under performing their potential.
Businesses are targeted that have strong headline fundamentals, such as high quality products, or a leading market share, to generate sustainable cash flows, achieve profit growth and create value for shareholders.
Since first listing in 2003, there have been four major acquisitions:
Nortek, Inc. was acquired in August 2016 in a deal with an enterprise value of £2.2 billion. Established in 1967, Nortek is a global, diversified group which manufactures innovative air management, security, home automation and ergonomic and productivity solutions. The acquisition of Nortek was financed from the proceeds of a fully underwritten rights issue, which raised approximately £1.6 billion, with the balance funded through debt of approximately £0.6 billion.
Elster Group SE was purchased for an enterprise value of £1.8 billion in August 2012. Elster is a world leading engineering business, established over 100 years ago, designing and making meters and gas utilisation products mainly for the energy market. The deal was funded by a fully underwritten Rights Issue, which raised £1.2 billion.
Elster was sold to Honeywell Inc. in December 2015 for £3.3 billion.
FKI plc was acquired in July 2008, for an enterprise value of approximately £1 billion. FKI was a major international diversified engineering group, including some businesses with very good market positions. Bridon, Brush, Crosby, Marelli, Truth, Harris and Acco were all part of FKI. However, all businesses but the Brush Group have now been sold
McKechnie and Dynacast
The McKechnie and Dynacast businesses were acquired, in May 2005, for £429 million. The various individual businesses that were acquired at this time were subsequently sold between May 2007 and June 2012 and created considerable shareholder returns.
Melrose is actively involved within each of the businesses, to agree strategy and targets, drive operational improvements, invest in the businesses it purchases, oversee change management and ensure a focus on operational improvements.
A business with strong fundamentals, Elster fitted the Melrose acquisition criteria. It was a high quality business with strong end markets that had the potential for significant development and improvement under Melrose management.
Elster served markets with attractive long-term demand drivers such as growing global energy demand, energy efficiency and conservation and global gasification and was the global leader in gas metering.
Melrose saw opportunities to improve Elster’s performance through increasing margins and improving the quality of the business through investment and development. Following its acquisition in August 2012, a variety of restructuring projects were completed within the Elster businesses.
Melrose successfully steered Dynacast through the global slowdown and the cost savings made during the downturn were retained as sales recovered.
Melrose invested fully in Dynacast to expand capacity, particularly in the Far East and to improve efficiency. Dynacast also successfully completed some bolt on acquisitions. Under Melrose ownership, sales in all three of Dynacast’s main geographic regions grew.
Within McKechnie, Melrose saw significant scope to invest in the business and improve its operational and financial performance by adopting a vigorous hands-on approach.
FKI had a weak balance sheet and borrowings which were due to be refinanced in the near term. The financing terms of Melrose’s acquisition enabled the balance sheet issues to be resolved and a more appropriate group borrowing structure with lower overall debt leverage.
In addition to addressing the financial constraints facing FKI, Melrose identified a number of opportunities to improve the performance of FKI’s businesses, principally through an increased focus on cash generation and profitability. Melrose invested in existing facilities and new capacity within the remaining businesses in order to continue growing these businesses. Examples of recent investments include Bridon’s new £20 million facility at Neptune Energy Park, Newcastle upon Tyne, UK, which became operational in November 2012 and a £30 million investment in a new production facility for Brush in China, which is due to commence production during 2015.
Since the acquisition of FKI, steps taken by Melrose have resulted in an increase in operating margin from 10% to 15%, which will result in substantial shareholder value being created.
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.