Engineering conglomerate Melrose today declared it was set to go “back to the hunt” for multi-billion pound takeovers after selling the bulk of its giant Nortek air conditioning division for $3.63 billion (£2.6 billion).
Melrose behaves something like a private equity company for engineering companies, with a motto of “Buy, Improve, Sell”.
Today, chief executive Simon Packham said the Nortek sale - which came only five years after it bought the company - meant he could start looking for new takeover targets later in the year.
“We bought Nortek for £2.2 billion and we could easily do that or go higher,” he told the Evening Standard. We have shareholder support to die for.”
The funds from today’s deal will be used to eradicate the pension deficit in its GKN division, fulfilling a promise to employees Melrose made at when it bought the UK engineer in an ill-tempered £8 billion hostile takeover in 2018.
While the deficit on an accounting level will now be in a small surplus, the actual funding deficit on GKN’s pension will come down from £1 billion to £200 million, and GKN has pledged to drop that further.
Melrose paid $2.8 billion for Nortek and has since received $1 billion in cash from running the business. That effectively means today’s sale price effectively doubles Melrose shareholders’ investment.
The remaining Nortek operations, with sales of around $400 million, will be sold later this year with analysts expecting them to fetch about $1 billion.
The £1.25 billion proceeds from today’s sale will also go towards paying down Melrose’s debt, with a return of funds to shareholders also on the cards.
Any future acquisition would see Melrose tap its shareholder base separately for funding and would not affect the returns from today’s deal.
Melrose claims that part of the reason for Nortek Air’s big sale price was its $75 million investment in a start-up division specialising in cooling datacentres used by Facebook and other tech giants.
The StatePoint technology uses water rather than air to keep the computers cool in a way that uses far less energy and water.
Simon Peckham, chief executive of Melrose, said StatePoint marked a change to Melrose’s normal business model of buying, improving and then selling businesses: “On our watch, our team has created a business from scratch with exemplary environmental credentials which will make a real difference to energy and water consumption in its market.
“We can now hand that technology to a high quality buyer with specialist aspirations and skills.”
He added: “This sale is good for [GKN] pensioners and good for Melrose. Our job now is to move to the “Buy” bit. At the end of this year, the beginning of next year, we will be back onto that.”
He added: “I don’t see why we can’t do the same kind of thing as Nortek, or it would be nice to add to our aerospace business.
“We spent £8 billion on GKN - not that we’ll do something of that size again but the signs here are that we are coming back to the hunt”
Melrose shares fell sharply last year as investors fretted about the impact on its business of Covid’s impact on air travel . From highs of around 246p before the pandemic struck, it plunged to 100p and has since been battling its way back up to 180p.
So-called “value stocks” in the markets such as the engineers Melrose specialises in buying have seen their share prices surge since the Covid vaccines were developed last year. However, Peckham said Melrose would still be able to find bargains.
“The market has always been expensive,” he said. “But we are not buying the market, we’re buying individual companies within the market. We are paid to unearth the undiscovered jewels so shareholders can enjoy the upside. There are always those opportunities.
“We follow a number of companies and there are opportunities to go and do this again.”