Shareholder investment and gain
Average annual return since first acquisition25%
Average return on equity across businesses sold2.7x
Shareholder value created to date£4.8bn
Investment in research and development in last five years£230m
Capital expenditure in last five years£250m
- Good manufacturing business whose performance can be improved.
- Use low (public market) leverage.
- Melrose management are substantial equity investors.
- Free management from bureaucratic central structures.
- Change management focus, incentivise well.
- Set strategy and targets and sign off investments.
- Drive operational improvements.
- Invest in the business.
- Focus on profitability and operating cash generation - not growth for the sake of growth.
- Commercially choose the right time to sell, often between 3-5 years but flexible.
- Return value to shareholders from significant disposals.
The Melrose approach
The improvements made by Melrose vary depending on the needs of the business but the common theme for all businesses is the implementation of the Melrose approach:
Giving ownership to the divisions.
Appropriately incentivising the management teams.
Freeing businesses from central bureaucracy.
Quick decision making.
Ready access to funds for capital expenditure, R&D and expansion projects.
Investment into the businesses
On average we spend one third of the original equity price paid.
Value creation model
Good manufacturing businesses whose previous potential was constrained.
Good demand drivers.
Multiple expansion is never assumed, but has been achieved on all previous deals (on average +30%) as the businesses have been improved.
Cash flows can be significantly improved.
How has Melrose created value?(1)
- Selling for a higher multiple than paid
- Cash generation
- Sales growth
- Margin growth
Melrose deal by deal
Our first acquisition was the combined McKechnie and Dynacast business, headquartered in Alcester, UK which we acquired from Cinven for £429 million, with Cinven becoming a 15% shareholder and a participant in future value creation.
As part of the acquisition process, to strengthen the businesses we deliberately and significantly reduced the leverage in McKechnie/Dynacast from approximately £690 million to approximately £190 million (from 10.3x to 2.9x EBITDA) in order to facilitate substantial further investments (capital expenditure was equivalent to 1.0x depreciation) and to enable contributions at the appropriate rate into the pension schemes.
McKechnie is a supplier of specialist engineered components to the global aerospace industry. During our ownership we improved operating margins at McKechnie from 18% to 24% by optimising its cost base and focusing on profitable business. Dynacast is a global provider of precision die cast components for a wide variety of industries including automotive, healthcare, consumer electronics, computers and peripherals. During our ownership we improved operating margins at Dynacast from 11% to 16% by successfully aligning capacity with customers and installing a success-driven organisational culture.
Overall we generated over £700 million in cash from the businesses versus an equity investment of approximately £240 million, resulting in a return of 3.0x on shareholders’ investment. This includes direct returns to shareholders after disposals of £220 million in 2007 and £373 million in 2011.
The McKechnie pension scheme was fully funded under our ownership and ultimately transferred to Honeywell, backed by a parent company guarantee.
|Acquired for||£0.4 billion|
|Bolt on acquisitions||-|
|Total Price||£0.4 billion|
|Sold for||£0.8 billion|
|Shareholder return on original equity||3.0x|
|Equity rate of return||30%|
|Investment in business||51%|
Our second acquisition was FKI, a UK publicly-listed conglomerate, which we acquired for approximately £1.0 billion. This comprised a number of diverse businesses and was, at the time, more than double the size of Melrose. Our offer for FKI was structured as approximately 50% in cash and 50% in new Melrose shares allowing the FKI shareholders to participate in the value creation potential.
As part of the acquisition process, to strengthen the businesses we deliberately reduced the leverage in FKI from approximately £470 million to approximately £340 million (from 3.7x to 2.7x EBITDA) in order to facilitate substantial further investments (capital expenditure was equivalent to 1.4x depreciation) and to enable contributions at the appropriate rate into the pension schemes.
Our improvement initiatives were centred around refocusing the FKI conglomerate to allow each of its businesses to stand alone and making necessary investments to strengthen their market positions. We improved operating margin from 10% to 15% under our ownership and have since sold all of the businesses with the exception of Brush.
Overall we generated over £1.4 billion in cash from the businesses versus an equity investment of approximately £500 million, resulting in a return of 2.9x on shareholders’ investment. This includes direct returns to shareholders after disposals of £595 million in 2014 and £200 million in 2015.
The FKI pension scheme was appropriately funded, and the main UK defined benefit scheme (excluding the Brush scheme, which is currently in surplus) was ultimately transferred to Honeywell, backed by a parent company guarantee.
|Acquired for||£1.0 billion|
|Bolt on acquisitions||-|
|Total Price||£1.0 billion|
|Sold for||£1.6 billion|
|Shareholder return on original equity||2.9x|
|Equity rate of return||30%|
|Investment in business||66%|
Elster, the most recent acquisition to have completed its improvement cycle, was a US publicly-listed, German-based manufacturer of meters operating through three separate divisions with different markets and drivers (Gas, Electricity, Water). Elster is a global company with presence in 135 countries, large contracts, long-standing customers and was on the cusp of a technology revolution with smart metering.
The business had lost its focus and identity with a centralised head office causing inefficiencies and issues for the businesses. We identified an opportunity and acquired Elster in 2012 for £1.8 billion, including £1.2 billion of equity (which was one of the largest equity raises in the UK market at the time).
Under our ownership we oversaw operating profit margins increase from 13% to 22%, representing a 70% improvement in just three years. This was achieved by focusing each business on performance, end markets, customers and operations. We significantly expanded on an optimisation programme announced by Elster before our acquisition and significantly exceeded expectations.
As with FKI, we followed our approach of focusing on operational efficiencies and exiting lossmaking sales first, followed by production optimisation and a focused investment programme (capital expenditure was equivalent to 1.3x depreciation), particularly in R&D as Elster was growing its “smart” capabilities.
In December 2015 we sold all three businesses as a package to Honeywell for £3.3 billion, representing approximately 14x 2014 headline EBITDA, and in February 2016 we returned £2.4 billion in cash to shareholders.
Overall we generated over £2.5 billion in cash from Elster versus an equity investment of approximately £1.2 billion, resulting in a return of 2.3x on shareholders’ investment.
|Acquired for||£1.8 billion|
|Bolt on acquisitions||£0.1 billion|
|Total Price||£1.9 billion|
|Sold for||£3.3 billion|
|Shareholder return on original equity||2.3x|
|Equity rate of return||33%|
|Investment in business||25%|
Our fourth acquisition was Nortek, a global, diversified group which manufactures innovative air management, security, home automation and ergonomic and productivity solutions.
Nortek was a US publicly-listed company which we acquired in August 2016 for £2.2 billion with £1.6 billion in equity raised from our very supportive shareholder base. Nortek has responded well to the Melrose model, posting record results at the half year 2017, making it the quickest turnaround in our history, with even stronger performance recorded in the second half of the year. As part of the acquisition process we significantly reduced the leverage in Nortek from approximately $1.4 billion to approximately $670 million (from 5.1x EBITDA to approximately 2.5x EBITDA).
Having decentralised the business to free it from bureaucracy and reorganised it into three divisions (Air Management, Security & Smart Technology and Ergonomics), adjusted profit was up approximately 50% in the first full year and approximately 65% when compared to the last full year prior to our acquisition. Nortek has since recorded adjusted operating margins of over 15%, a full 5 percentage points of improvement.
The full benefits of our ongoing investments at a rate of 2.0x depreciation to implement the necessary improvement programmes are still unfolding.