July 13, 2016    3 minute read

What Lies Beneath Melrose’s £2.2bn US Acquisition

New Trends    July 13, 2016    3 minute read

What Lies Beneath Melrose’s £2.2bn US Acquisition

One company seeking to grab the cautious market by its horns is Melrose PLC, a British-based investment company who specialises in industry turnaround. The FTSE 250-listed company looks to acquire underperforming businesses with potential, improve them and sell – a model similar to that of private equity. Last week, Melrose announced its optimistic plans to acquire US home products company Nortek for $2.8bn (£2.2bn), in a bet on the US construction market.

Buy, Improve And Sell

Since making a handsome return of £1.5bn after selling its German gas and electric meters business Elseter to Honeywell last year, Melrose has been on the hunt for a new company to acquire. The acquisition of Nortek provides Melrose with an innovative exposure into a global conglomerate of markets (air management, security, home automation and ergonomic and productivity solutions) during a period when the US construction market is thriving. Undoubtedly, shareholders and investors will certainly approve this proposed acquisition as Melrose shares shot up by 23% in the early morning after the announcement.

 

Screen Shot 2016-07-07 at 22.14.15

Source: Google Finance

 

Trend: European Companies Buying In The US

The acquisition of all Nortek shares began in March this year but finalised just after the result of Britain to leave the EU. Investment-banking consultant Jeffrey Nassof, a director at Freeman Consulting Services, commented on the effects of Brexit and the opportunity it has created: “The more uncertainty and weakness there is in Europe, the more attractive the US is going to look. Brexit is one more reason that the US looks relatively good to European firms.”

Furthermore, analysts have commented on the deal, stating that it could be part of an emerging trend for European companies to make acquisitions in the United States. This is due to Britain’s decision to leave the European Union and hence, shaky markets confidence within the EU and Asian economies.

According to sources quoted by the media, “only the brave can pull off deals in this environment.”

Synergies Across The Ocean

The expected synergy achieved through the acquisition can be attributed to various factors, such as increased revenues, combined talent and technology, or cost reduction.

 23% was the rise in Merlose’s shares
after announcing the deal

 

This acquisition represents a significant opportunity for Melrose to execute its strategy of ‘buy, improve, sell’ and diversify its portfolio into global markets. However, along with the potential gains, Melrose will take on around $1.4bn of Nortek’s debt, which they plan to reduce in order to improve the group’s cash flow. Even though the US construction market has taken a hit recently, Melrose has commented positively on US economic indicators.

Analysts at Numis said Nortek offered Melrose “quick potential opportunities” to improve two of their underperforming businesses – keeping inline with their ethos. Moreover, as 90% of Nortek’s sales are in North America, and its products are in 80% of US households, this opens up a great opportunity to emerge into the US market.

Setting the Tone for UK Companies?

Funding this acquisition will involve a $1.25bn loan from four major banks – Bank of America Merrill Lynch, Lloyds, HSBC and JP Morgan. At first glance, this could be acknowledged as a success for UK loans post the chaos in the EU market showing a healthy appetite for ambitious acquisitions. However, Melrose, like other private equity-based companies, has a great relationship with banks from to previous support for similar acquisitions. Therefore, with a strong track record, banks are happy to accommodate. The acquisition is expected to be completed by the end of August.

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